The judgment of Govindan Nair and Mathew JJ. was delivered by :
GOVINDAN NAIR J. - The Commissioner of Agricultural Income-tax, Board of Revenue (Taxes), Trivandrum, has stated a case and referred the following question for our decision :
'Whether, on the facts and in the circumstances of the case, the Commissioner has jurisdiction to pass an order in this case under section 34 of the Agricultural Income-tax Act, 1950 ?'
The facts necessary for answering the question may be state. One Shri T. V. Kochuvareed was assessed to agricultural income-tax for the years 1959-60 and 1960-61. The assessee had claimed expenses towards the upkeep and maintenance of immature rubber plants, the agricultural income taxed having been derived from a rubber plantation. The Agricultural Income-tax Officer disallowed, out of such expenses claimed by the assessee, a sum of Rs. 2,500 for the year 1959-60, and a sum of Rs. 3,500 for the year 1960-61. Thereafter, on March 13, 1963, the Commissioner of Agricultural Income-tax issued a notice (appendix A to the statement of the case) under section 34 of the Agricultural Income-tax Act, 1950 (hereinafter referred to as 'the Act'), proposing to revise suo motu, the assessments for the years 1959-60 and 1960-61. He stated the reason for the proposal to be that the computation of expenses pertaining to immature rubber plants was too low and that it had resulted in income having 'escaped assessment'. This notice was issued to the widow then moved this court by O. P. No. 877 of 1963 for quashing the notice and one of us allowed the petition by his judgment dated September 4, 1964. However, in appeal by the department, it was held that the question must first be dealt with by the Commissioner and the Commissioner was directed to do so. The right of the petitioner in the original petition to approach this court afresh in appropriate proceedings, if she was aggrieved by the orders passed by the Commissioner, was also reserved. Thereafter, the assessee filed an objection to the notice dated March 13, 1963, on February 18, 1966 (appendix B to the statement of the case). There was a further notice (appendix C) and a further reply (appendix D). The assessee contended in her replies to the notices that the power of revision vested in the Commissioner under section 34 of the Act could not be invoked for the purpose of assessing income that had escaped assessment and that such income could be assessed only by resorting to the procedure under section 35 or section 36 of the Act. The Commissioner, it was urged, could at best give only a direction to the Agricultural Income-tax Officer, on whom specific powers have been conferred by section 35, to reassess and thus tax income that had escaped assessment. Such direction, it was further urged, could not be given after the expiry of the period provided by section 35, namely, three years from the end of the financial year for which the agricultural income was first assessed.
Rejecting the above contentions, the Commissioner by order dated August 23, 1967, set aside the assessments for the years 1959-60 and 1960-61 and 'remanded' the cases to the Agricultural Income-tax Officer for fresh disposal. The operative portion of the order runs thus :
'In these circumstances, I find that the disallowance of Rs. 2,500 for 1959-60 and Rs. 3,500 for 1960-61 towards upkeep and maintenance of immature area is irregular as it is not based on any rational method. The orders of assessment for these years are therefore set aside and the cases are remanded to the Agricultural Income-tax Officer, Trichur, for fresh disposal according to law after examining each item of expenditure individually and the general charges by applying the principles laid down by the Kerala High Court in its judgment in Commissioner of Agricultural Income-tax v. Johnsons Estates and Agencies Ltd.'
In the application under section 60(2) of the Act the assessee had requested that three questions be referred (vide page 2 of the paper book) to this court for its decision. The Commissioner, however, has referred only the question that we have read.
It is necessary to refer to sections 34, 35 and 36 of the Act :
Section 34 :
'Revision - (1) The Commissioner may, of his own motion or on application by an assessee, call for the record of any proceeding under this Act which has been taken by any authority subordinate to him and may make such enquiry or cause such enquiry to be made and, subject to the provisions of this Act, may pass such orders thereon as he thinks fit :
Provided that he shall not pass any order prejudicial to an assessee without bearing him or giving him a reasonable opportunity of being heard :
Provided further that an order passed declining to interfere shall not be deemed to be an order prejudicial to the assessee.
(2) Any order passed under sub-section (1) shall be final subject to any reference that may be made to the High Court under section 60.'
Section 35 :
'Income escaping assessment. - (1) If for any reason agricultural income chargeable to tax under this Act has escaped assessment in any financial year or has been assessed at too low a rate, the Agricultural Income-tax Officer may, at any time within three years, of the end of that year serve on the person liable to pay the tax or in the case of a company on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 17 and may proceed to assess or reassess such income and the provisions of this Act shall, so far as may be, apply accordingly as if the notice issued under that sub-section :
Provided that the tax shall be charged at the rate at which it would have been charged if such income had not escaped assessment or full assessment, as the case may be :
Provided further that the Agricultural Income-tax Officer shall not issue a notice under this sub-section unless he has recorded his reasons for doing so.
(2) No order of assessment under section 18 or of assessment or reassessment under sub-section (1) of this section shall be made after the expiry of three years from the end of the year in which the agricultural income was first assessable :
Provided that where a notice under sub-section (1) has been issued within the time therein limited, the assessment or the 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 three 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, assessment or reassessment may be made shall apply to a reassessment made under section 19 or to an assessment or reassessment made in consequence of, or to give effect to any finding or direction contained in, an order under section 31, section 32, section 34 or section 60.
(3) In computing the period of limitation for the purposes of this section, any period during which the assessment proceeding is stayed by any order or injunction of any court or other competent authority shall be excluded.'
Section 36 :
Rectification of mistakes. - (1) The authority which passed an order on appeal or revision may at any time within three years from the date of such order passed by him on appeal or in revision, and the Agricultural Income-tax officer may at any time within three years from the date of any assessment or refund order passed by him, of his own motion, rectify any mistake apparent from the record of the appeal, revision, assessment or refund, as the case may be, and shall within the like period rectify any such mistake which has been brought to his notice by an assessee :
Provided that no such rectification shall be made having the effect of enhancing an assessment or reducing a refund unless the appellate or revisional authority or the Agricultural Income-tax Officer, as the case may be, has given notice to the assessee of his intention so to do and has allowed him a reasonable opportunity of being heard.
(2) Where any such rectification has the effect of reducing the assessment, the Agricultural Income-tax Officer shall make any refund which may be due to such assessee.
(3) Where any such rectification has the effect of enhancing the assessment or reducing a refund, the Agricultural Income-tax Officer shall serve on the assessee a notice of demand in the prescribed form specifying the sum payable and such notice of demand shall be deemed to be issued under section 30 and the provisions of this Act shall apply accordingly.'
Before proceeding to interpret these provisions of the Act, it is necessary to dispose of two contentions raised by the department. The first of these is that income had not escaped assessment in this case and that section 35 is therefore not attracted at all. This contention has to be rejected in view of the decision of the Supreme Court in Maharajadhiraj Sir Kameshwar Singh v. State of Bihar. The section that came up for interpretation before the Supreme Court was section 26 of the Bihar Agricultural Income-tax Act, 1938, which is in these terms :
'If for any reason any agricultural income chargeable to agricultural income-tax has escaped assessment for any financial year, or has been assessed at too low a rate, the Agricultural Income-tax Officer may, at any time within one year of the end of that financial year, serve on the person liable to pay agricultural income-tax on such agricultural income or, in the case of a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 17, and may proceed to assess or reassess such income, and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section :
Provided that the tax shall be charged at the rate at which it would have been charged if such income had not escaped assessment or full assessment, as the case may be.'
Section 35(1) of the Act which we have read is identical excepting for the period within which the notices should be sent, this section providing for one year and section 35 of the Act, 3 years. This difference is not material for determining the question whether income had escaped assessment.
The question that arose for decision before the Supreme Court was whether income could be said to have escaped assessment when the income had actually been returned by the assessee and was thus brought to the notice of the Agricultural Income-tax Officer, and, after adverting to the income, the Agricultural Income-tax Officer had granted exemption. A few passage from the judgment may be extracted :
'The short question is whether income which was returned but was held to be exempt from tax could be said to have escaped assessment so that the Agricultural Income-tax Officer could exercise his powers under section 26 of the Act to tax it. This question arising under section 34 of the Indian Income-tax Act has been considered on many an occasion by the High Court has correctly pointed out that the preponderance of opinion is in favour of holding that such income can be said to have escaped assessment.
The High Court in deciding that the Agricultural Income-tax Officer had jurisdiction to revise his earlier assessment referred to the opening words of section 26, namely, for any reason and observed that it was not necessary to give a restricted meaning to the word escaped, and that if an item of income was not charged to tax due to a mistake or oversight on the part of the taxing authorities, that item could well come within the term escaped. According to the High Court, the phrase escaped assessment was not confined to cases where there had been an inadvertent omission, but in view of the latter part of the section where income...... has been assessed at too low a rate, included a case where there was a deliberate action.'
Their Lordships then referred to the contentions of counsel for the assessee and the Attorney-General who appeared for the revenue and to the decisions relied on by them. Two of the decision-one relied on by the Attorney-General in Maharaj Kumar Kamal Singh v. Commissioner Income-tax and the other by the assessees counsel in Chatturam Horilram Ltd. v. Commissioner of Income-tax - were decisions of the Supreme Court. Before referring to the other authorities of the High Courts, their Lord-ships examined the question whether those decisions were in point or not; and if so, which one was applicable. They extracted the following passage from the judgment of Gajendragadkar J. in the decision in Maharaj Kumar Kamal Sing v. Commissioner of Income-tax :
'Even if the assessee has submitted a return of his income, cases may well occur where the whole of the income has not been assessed and such part of the income as has not been assessed can well be regarded as having escaped assessment. In the present case, the rents received by the assessee from his agricultural lands were brought to the notice of Income-tax Officer; the question as to whether the said amount can be assessed in law was considered and it was ultimately held that the relevant decision of the Patna High Court which was binding on the department justified the assessees claim that the said income was not liable to be assessed to tax. There is no doubt that a part of the assessees income had not been assessed and, in that sense, it has clearly escaped assessment. Can it be said that, because the matter was considered and decided on the merits in the light of the binding authority of the decision of the Patna High Court, no income has escaped assessment when he said Patna High Court decision has been subsequently reversed by the Privy Council We see no justification for holding that cases of income escaping assessment must always be cases where income has not been assessed owing to inadvertence or oversight or owing to the fact that no return has been submitted. In our opinion, even in a case where a return has been submitted, if the Income-tax Officer erroneously fails to tax a part of assessable income, it is a case where the said part of the income has escaped assessment. The appellants attempt to put a very narrow and artificial limitation on the meaning of the word escape in section 34(1) (b) cannot therefore succeed.'
Their Lordships then continued :
'The assessee seeks to distinguish that case on the ground that this court laid down the law in the special circumstances where a new interpretation to the law was given, and that it was not a case of the the Income-tax Officer changing his mind. He contends that there was at least some information which had come to the Income-tax Officer, on which his subsequent action could be rested. The learned counsel argued that Gajendragadkar J., had expressly left the question open, where there was no information but the Income-tax Officer merely changed his mind without any information from an external source. Reference in this connection is made to the following observations in the judgment :
It appears that, in construing the scope and effect of provisions of section 34, the High Court have had occasion to decide whether it would be open to the Income-tax Officer to take action under section 34 on the ground that he thinks that his original decision in making the order of assessment was wrong without any fresh information from an external source or whether the successor of the Income-tax Officer can act under section 34 on the ground that the order of assessment passed by his predecessor was erroneous, and divergent views have been expressed on this point. Mr. Rajagopala Sastri, for the respondent, suggested that under the provision of section 34 as amended in 1948, it would be open to the Income-tax Officer to act under the said section even if he merely changed his mind without any information from an external source and came to the conclusion that, in a particular case, he had erroneously allowed an assessees income to escape assessment. We do not propose to express any opinion on this point in the present appeal.
We may say at once that the words of section 26 of the Act do not involve possessing of or coming by some fresh information. The section says :
If for any reason any agricultural income chargeable to agricultural income-tax has escaped assessment for any financial year........ the Agricultural Income-tax Officer......... may proceed to assess........ such income.......
The use of the words any reason which are of wide import dispenses with those conditions by which section 34 of the Indian Income-tax Act is circumscribed. The point which was thus left over by Gajendragadkar J. cannot arise in the context of the Act we are dealing with.
In view of this clear opinion, it is hardly necessary for us to consider again the cases which proceeded the decision of this court. The most important of them are considered in the judgment of Gajendragadkar J. Most of the cases are also considered in judgment of Harries C.J. and Mukherjea J. (as he then was) in Maharaja Bikram Kishore v. Province of Assam.'
Their Lordships then referred to the decision of the Privy Council in Rajendranath Mukerjee v. Commissioner of Income-tax and concluded that the observations in that decision, namely :
'The facts that section 34 requires a notice to be served calling for a return of income which has escaped assessment strongly suggests that income which has already been duly returned for assessment cannot be said to have escaped assessment within the statutory meaning.'
must be understood in the context of the pendency of assessment proceedings and observed that the matter was decisively cleared of any doubt by the following passage in the decision :
'It may be that if no notice calling for a return under section 22 is issued within the tax year then section 34 provides the only means available to the Crown of remedying the omission, but that is a different matter.'
Their Lordships then went on to say :
'In our opinion, the error in the cases relied upon by the assessee arises in using the dicta in the above case, shorn of the context in which they were made and applying them to the facts, where they cannot. The judgment of Gajendragadkar J. has dealt with the matter, if we may say so respectfully, very adequately and we do not consider it necessary to cover the same ground again. The preponderance of opinion in the High Courts is also to accept the contrary view, and we think rightly.'
Thereafter, reference was made to the other decision of the Supreme Court in Chatturam Horilram Ltd. v. Commissioner of Income-tax. The decision was distinguished and their Lordships quoted in extenso a passage from the judgment of Gajendragadkar J. in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax, distinguishing the decision in Chatturam Horilram Ltd. v. Commissioner of Income-tax. Then their Lordships concluded :
'For the reasons we have given, we are of opinion that the Agricultrural Income-tax Officer was competent under section 26 of the Act to assess an item of income which he had omitted to tax earlier, even though in the return that income was included and the Agricultural Income-tax Officer then thought that it was exempt. The answer given by the High Court was therefore correct.'
This decision of the Supreme Court, we consider, concludes the matter and the revenue cannot be heard to say that, on the facts of this case, there had been no escape of income to attract the provisions in section 35 of the Act. Even so, it was urged by counsel for the revenue that it must be held that there was no escape of income and in support of this contention he relied on two decisions of the Supreme Court in Deputy Commissioner of Agricultural Income-tax and Sales Tax v. Dhanalakshmi Vilas Cashew Co. and State of Kerala v. K. E. Ninan. In both these cases the statutory provisions that came up for interpretation were section 15(1) (i) of the General Sales Tax Act, 1125 (Kerala), and rule 33 of the General Sales Tax Rules, 1950. Their Lordships held that, on the facts of the case before them, the turnover had not escaped assessment and rule 33 had no application. It was, therefore, held that the Commissioner could exercise his powers under section 15(1) (i) of the General Sales Tax Act, 1125 M. E. Counsel has strongly relied on the conclusions reached by the Supreme Court that there was no escape of turnover and has urged that this view taken in the later decision must govern the present case. We are unable to accept this contention. The decision in Maharajadhiraj Sir Kameshwar Singh v. State of Bihar deals with escape of agricultural income with reference to section 26 of the Bihar Agricultural Income-tax Act, 1938, which, as already indicated, is identical in material respects with section 35 of the Act. It is a direct authority on the point. We are, therefore, bound to follow that decision.
Before leaving these decisions on the sales tax enactment cited by counsel we may note that they are authorities for the proposition that the provision for revision, viz., section 15(1) (i), will have no application when there is escape of turnover. It will be useful to refer to a passage from the decision in Deputy Commissioner of Agricultural Income-tax and Sales Tax v. Dhanalakshmi Vilas Cashew Co. dealing with the jurisdiction under section 15(1) (i) empowering the Deputy Commissioner to call for and examine the records of the case suo moto and the power under rule 33 of the General Sales Tax Rules, 1950. Referring to section 15 (1) (i), their Lordships observed :
'This jurisdiction is quite distinct and separate from the one created by rule 33 which obviously has been framed under clause (f) of section 24(2). That rule enables the assessing authority within the prescribed period to determine to the best of its judgment the turnover of a dealer which has escaped assessment. Section 15(1) is meant for interference when there is some illegality or impropriety or irregularity in the order of the assessing authority which has to be set right. It can hardly be said to cover those cases in which the turnover has escaped assessment.'
The Second contention that has been raised by counsel on behalf of the revenue is that in the revision order of the Commissioner dated August 23, 1967, in Revision Cases Nos. 27 and 28 of 1963-64 which is at page 9 of the paper book, a definite finding has been entered that there is no 'escape of income' and so it is urged that this is not a case of 'escaped income' which can fall under section 35 of the Act and that in cases where a definite findings has been entered on a question of fact, unless a specific question has been referred, this court cannot go behind the finding of fact. Counsel relied on the running of the Supreme Court in India Cements Ltd. v. Commissioner of Income-tax, in support of this contention.
We are unable to accept the contention that there has been any finding of fact in this case by the Commissioner which the assessee should canvass before this court. It is clear from discussion in the order of the Commissioner dated August 23, 1967 (see pages 12 and 13 of the paper book), that the conclusion that there is no escape of income to attract section 35 of the Act has been reached on a point of law and not on any question of fact. This is evident from the concluding part of the discussion which is at page 13 of the paper book reading thus :
'Thus in this case a considerably large amount of income has actually escaped assessment on account of the inadequacy of estimate of the disallowable expenditure. But the Agricultural Income-tax Officer could not himself take a different view and re-estimate the disallowable expenditure and assess the difference.'
The last sentence in the above observation arises out of the interpretation placed on section 35 of the Act (which is a conclusion on a question of law) and the view taken by the Commissioner is directly opposed to the view taken by the Supreme Court in Maharajadhiraj Sir Kameshwar Singh v. State of Bihar and as a proposition of law cannot be sustained. It is only based on this proposition enunciated by the Commissioner that he thereafter proceeded to state :
'This irregularity caused by wrong judgment could be set right only under section 34. This is not thus a case of escape of income coming under section 35.'
The question referred to us is whether the Commissioner has jurisdiction to pass the order that he passed under section 34 of the Act. The answer to this will depend on the interpretation to be placed on sections 34 and 35 of the Act and whether section 35 is attracted in the case. If section 35 is applicable, it is clear from the analogy of decisions of the Supreme Court in Deputy Commissioner of Agricultural Income-tax and Sales Tax v. Dhanalakshmi Vilas Cashew Co. and State of Kerala v. K. E. Ninan already referred to by us, dealing with the provisions in the General Sales Tax Act, 1125, and rule 33 of the General Sales Tax Rules, that section 34 cannot cover cases where there has been escape of income. The position is also clear from a series of decision to which we shall be referring. On the facts and circumstances of this case, whether there has been escape of income to attract section 35 depends on the interpretation to be placed on section 35 (and as we have seen it has seen it has to be held that the section is attracted (Maharajadhiraj Sir Kameshwar Singh v. State of Bihar) and this is only an aspect of the question referred to us. As has been ruled by the Supreme Court 'it will be an over-refinement of the position to hold that each aspect a question is itself a distinct question' (See the ruling in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd.)
Whether there is any escape of income and whether section 35 of the Act is attracted are questions arising from the order of the Commissioner and are covered by the question referred. We, therefore, negative this contention as well.
The question then is whether the power of revision conferred on the Commissioner by section 34 of the Act can be utilised for the purpose of reassessment of income that escaped assessment. The question is important in view of the fact that the power of revision under section 34 of the Act can be exercised at any time by the Commissioner as there is no period within which it should be done, the Act having provided no such period; whereas, if the Agricultural Income-tax Officer is to act under section 35, or for that matter under section 36, he will have to function within the prescribed periods provided by those sections. The object of proceedings under sections 34 and 35 in a given case can be the same : to rope in income that had escaped assessment; the subject-matter of the proceedings is also the same, being the income that escaped assessment. The only difference is that under section 34 the Commissioner exercises his revisional powers, and under section 35 of the Agricultural Income-tax Officer, his powers of assessment or reassessment granted by the section. The department contends for the position that although if the Agricultural Income-tax Officer wanted to assess the income that had escaped assessment, he must issue a notice as under section 17(2) of the Act within three years of the end of the assessment years concerned and also proceed the reassess within the same period, or if notice had been issued, within an year thereof if the commissioner purported to do the same thing to the same assessee in regard to the same escaped income, he can wait for any length of time and assess the income that had escaped assessment at any time he deems fit and need not issue notice under section 17(2). With regard to a similar contention, Lord Romer, sitting on the Judicial Committee of the Privy Council, observed in Commissioner of Income-tax v. Khemchand Ramdas :
'Their Lordships would, in any case, hesitate long before acceding to a contention that would lead to so extravagant results. In their opinion, however, the contention cannot prevail. The Commissioners power under section 33 can only be exercised subject to the provisions of the Act of which the provisions in section 34 and 35 are in this respect of the greatest importance.'
The sections there referred to were sections 34 and 35 of the Indian Income-tax Act, 1922, as they stood before the amendments of 1939. Those sections as they stood at that time were in material respects similar to the sections with which we are concerned here excepting with regard to sub-section (2) of section 35 of the Act to which we shall advert in due course.
Starting with the decision to Commissioner of Income-tax v. Khemchand Ramdas, which was decided as early as April, 1938, there is a catena of decisions which have taken the view which can be summarised in the words of the Chief Justice of the Cochin High Court in the judgment in Commissioner of Income-tax v. Hajee Ibrahim Kassam :
'The Principle which emerges from the case law examined above is that the rather indefinite language in section 43(2) according to which the Commissioner can pass orders..... should be understood as being limited by three conditions, viz., (1) that he cannot himself pass an order which according to Act has to passed by another officer though he can give directions in that behalf consistently with the provisions of the Act, (2) that in making his order under the section he cannot himself override, nor can he direct or allow subordinate officers to override any of those provisions, and (3) that subject as aforesaid, he can exercise his powers of revision by calling for the record of any proceedings which has been taken by any authority subordinate to himself and correcting errors if any committed by him, whether the result of such action be an enhancement or a reduction.'
The sections therein considered were sections 43 and 44 of the Cochin Income-tax Act, 1117 M. E., which are in pari materia, as far as the relevant aspects are concerned with the sections of the Act and the facts of the case are as follows :
By an assessment order passed under the Cochin Income-tax Act, 1117 M. E. (VI of 1117 M. E.), on 25-11-1117 M. E., the income of an assessee for the accounting period ending July 2, 1941, was assessed to tax for the assessment year 1117 M. E. There was an appeal before the Commissioner and the appellate order which reduced part of the Burmah profits was on 30-12-1117 M. E. On 15-12-1118 M. E., the Deputy Commissioner wrote the following letter to the Commissioner of Income-tax :
'From copies of the British Indian assessment order filed by the assessee in connection with the excess profits tax assessment for 1117, it is seen that the Burmah profits of the assessee were :
Rs.
In 1937-38
59,350-0-0
In 1938-39
83,692-3-0
From the above figures, it may be noted that the profits of the assessee in Burmah were only increasing with the lapse of time. Further, by the time the first chargeable accounting period was reached, viz., accounting period 1940-41, there was also as increase in capital at Burmah by about one and a quarter lakhs of rupees, not to speak of the general improvement in the level of profits due to war conditions. I may be permitted to submit that all these facts would only show that the profits of 1940-41 should have been much higher than those made in the anterior periods or at least as much as those profits. In the absence of full data at the time of the disposal of last years appeal, such income had to be estimated by the Commissioner and the estimate was put down at Rs. 30,000. In the light of the new facts submitted by me, it may be considered whether the question should not be reopened and the assessment revised. If this is not done, the excess profits tax assessment for 1117 M. E. will be very much reduced profits and increase in capital in the chargeable accounting period.
The relative British Indian assessment orders are submitted for perusal and return.'
The Commissioner then issued a notice to the assessee to show cause why the assessment of the Burmah profits should not be enhanced. The Commissioner was purporting to act under section 43 of the Act referred to, which corresponds to section 34 of the Act. The question that was considered whether, on the above facts, the Commissioner was authorised, in the exercise of his power of revision under section 43, to enhance the assessable income. The question referred to the court was :
'Whether, under section 43 of the Cochin Income-tax Act, VI of 1117 M. E., the Commissioner can in the light of fresh evidence which come to his notice, enhance an assessment made under section 41 by the appellate authority ?'
and the conclusion reached is as follows :
'In the present case the Commissioner has made an order under section 43 which can only be made under section 44 and only by the Deputy Commissioner who under section 8(2) had been empowered to exercise the powers of the Income-tax Officer. I am of opinion that that order is one which he is not entitled to pass. I would, therefore, answer the question referred in the negative.'
The Kerala High Court has taken the same view after an elaborate discussion of the case law on the subject in Suppan Chettiar v. Commissioner of Agricultural Income-tax. The facts of the case which gave rise to the decision are these. One Suppan Chettiar had donated some of his properties to his minor sons. For the assessment of Suppan Chettiar for the year 1951-52 and 1952-53 the income from the properties gifted to the minor sons was not included and his assessments for those years were completed on January 31, 1955. On January 9, 1957, the Inspecting Assistant Commissioner wrote a letter to the Commissioner indicating that the income from the properties gifted to the minor sons should also have been included in the assessment of Suppan Chettiar. The Commissioner after receipt of this letter initiated proceedings under section 34 and after notice of the revision proceedings to Suppan Chettiar, passed an order on April 2, 1957, which runs thus :
'The assessment for 1951-51 and 1952-53 shall, therefore, be modified including the income from the properties transferred to the minor sons. The Agricultural Income-tax Officer, Special Circle, Kottayam, will make a revised assessment according to law including the income from the properties allotted to the two minor sons of the assessee also and issue revised demand notices accordingly'.
The conclusions reached are seen at paragraph 31 of the judgment :
'(i) When a particular assessment which has become final is sought to be reopened and reassessment is sought to be made on the assessee, any income which was not included in the original assessment and which was also not taken into consideration in making that assessment has to be held to be income which has escaped assessment, within the meaning of section 35 of the Travancore-Cochin Agricultural Income-tax Act, so far as that assessee is concerned, and no reassessment can be made on the assessee except under section 35 and in accordance with the provisions thereof;
(ii) in exercise of his revisional powers under section 34 of the Travancore-Cochin Agricultural Income-tax Act, the Commissioner cannot in such a case reopen the assessment and make a reassessment including the escaped income and can only give a direction to the Agricultural Income-tax Officer to take steps under section 35; and
(iii) Since the Commissioner cannot direct the Agricultural Income-tax Officer to do anything which the latter is not competent to do and since the Agricultural Income-tax Officer is competent to reopen an assessment and make a reassessment under section 35 only after issuing the notice under that section, which has to be issued within three years of the financial year for which the concerned assessment had been made, the Commissioner is not competent to exercise his revisional power for giving a direction to the Agricultural Income-tax Officer to reopen an assessment and make a reassessment after the lapse of the period prescribed for issuing the notice under that section.'
A full Bench of the Madras high Court consisting of Coutts Trotter C.J. and Beasley and Srinivasa Aiyangar JJ. has also come to the same conclusion in the decision in Commissioner of Income-tax v. Sheik Abdul Kadir Maracayar, on the following facts. A portion of the income of the assessee had escaped assessment for 1923-24 and the proceedings taken by the Income-tax Officer under section 34 of the Indian Income-tax Act, 1922, to reassess were set aside in appeal on the ground that there was no proper service of notice as required by section 34. Thereafter, the Commissioner purported to taken action under section 33 (the revision section) stating that :....
'as the Income-tax Officer really commenced proceedings, I shall, under section 33, take up those proceedings at the stage at which it was left and proceed to reassess the parties by virtue of the powers vested in me of revision under section 33 of the Act.'
It is observed in the judgment of the court given by Srinivasa Aiyangar J. that the power to reassess is given expressly by section 34 and that the section prescribes the condition precedent to any such valid reassessment, the condition precedent being service within one year of a proper notice on the assessee giving notice of the intention on the part of the Income-tax Officer to reassess, and his Lordship continued :
'The power of reassessment is given in express terms only to the Income-tax Officer and not to any other officer, the Assistant Commissioner or the Commissioner. If it was intended by the legislature that the Commissioner or the Assistant Commissioner should also have similar powers, there is no reason why all of them should not have been mentioned as in the case of section 28. When it a question of reopening an assessment already completed and when the statute prescribes the particular mode in which alone reassessment can be effected, it is clear that the condition should be rigidly observed before the power is purported to be exercised........
Thus from the scheme of the Act, it would be clear that it is the Income-tax Officer alone that can initiate reassessment proceedings. But, if the Income-tax Officer should make a mistake and after having started reassessment proceedings fail to reassess the parties, the proceedings of the Income-tax Officer would undoubtedly to open to revision by the Commissioner under section 33, and he may thereupon pass any order as he thinks fit. But, it must be borne in mind that the condition precedent to this exercise of the power of reassessment is the proper service of notice indicated in section 34. We may even go further and indicate that in this very case although the Assistant Commissioner set aside the order of reassessment made by the Income-tax Officer on the view that the Assistant Commissioner took of the validity of the service of the notice, it was still open to the Commissioner under section 33 to revise that order of the Assistant Commissioner, set it aside and restore the order of the Income-tax Officer. But this was not what was done or even purported to be done. The Commissioner for purposes of his order of reassessment that the order of the Assistant Commissioner regarding the validity of the service of the first notice was right and proper, and that finding has not been set aside.
The question then resolves itself into whether, in the absence of the service of notice within the year as indicated in section 34, it is open to the Commissioner to serve another notice after the lapse of the year and seek to reassess the parties. It seems to me, having regard to the scheme of the Act, that the condition precedent for reassessment being the service of the notice as indicated in section 34, and such service of notice not having been effected according to the findings, the Commissioner has no right to initiate further or fresh proceedings for reassessment. The power of revision given in section 33 is a power merely of revision and such powers cannot be regarded as being larger than the powers of a court of appeal. It, therefore, follows that so long as the Commissioner did not in revision seek to set aside the finding of the order of the Assistant Commissioner with reference to the service of notice, it follows that we must proceed on the footing that there had been no valid service of notice within the time under section 34 of the Act and that, therefore, the condition precedent for reassessment has not been satisfied or complied with.'
It was held that the Commissioner could not act in the above circumstances under section 33 of the Indian Income-tax Act, 1922.
The Rangoon High Court in Commissioner of Income-tax v. Ved Nath Singh had to consider the question whether the Commissioner acting under section 33 of the Burma Income-tax Act (which corresponds to section 33 of the Indian Income-tax Act, 1922), was by himself competent to reopen a final assessment and make a fresh assessment without directing the Income-tax Officer to proceed under section 34 of the Burma Income-tax Act, 1922). Robert C.J. expressed himself thus on the question :
'The Commissioner cannot, by purporting to act under section 33 of the Act, take action under section 34, although he can, if the time within which such action must be taken has not expired, direct the Income-tax Officer to take such action. It is plain from the provisions of section 34 that under this section there must be a fresh notice under section 22(2), requiring the assessee to make a new return of his income from all sources and following thereon a fresh assessment under section 23. From such fresh assessment there would be a right of appeal under section 30 to the Assistant Commissioner, and under appropriate conditions a right of appeal under section 32 or application in revision under section 33 to the Commissioner. The Commissioner cannot deprive the assessee of these rights by acting in reality under section 34 in the guise of acting under section 33.'
The same view has been taken by two decisions of the Bombay High Court in Commissioner of Income-tax v. Edulji Dinshaw (decided by Beaumont C.J. and Kania J.) and in Commissioner of Income-tax v. Mangaldas Motilal, (decided by Beaumont C.J. and Chagla J.). In the earlier case, Beaumont C.J. observed as follows :
'In my opinion, it is clear that the Commissioner of Income-tax cannot by a revision order under section 33 enhance the tax on the ground that income has escaped assessment, unless he proceeds under section 34. He can, no doubt, under section 33, direct the Income-tax Officer to take action under section 34; but, in my opinion, if a reassessment is to be made on the ground that income has escaped assessment, that can only be done by the procedure laid down under section 34. The argument of the Commissioner seems to me to produce most extraordinary results. His contention is that under section 33 he can call for the papers before the Income-tax Officer, at any rate within the time limited by section 34, and he can then of his own motion enhance the assessment on the ground that income has escaped assessment, or been assessed at too low a rate...... At the time when the Commissioner took action under section 33 the assessment was that which had been arrived at as a result of the Appellate Assistant Commissioners order, and, in my judgment, the Commissioner had no power to increase that amount on the ground that income has escaped assessment, or been assessed at too low a figure, except by directing the Income-tax Officer to proceed under section 34. That view is in accordance with the views expressed by two High Courts, the Madras High Court in Sheik Abdul Kadir v. Commissioner of Income-tax and by the Rangoon High Court in Commissioner of Income-tax v. Ved Nath Singh....
Section 33 only enables the Commissioner to make an order subject to the provisions of the Act, and I think the decision of the Privy Council to which we have been referred, in Commissioner of Income-tax v. Khemchand Ramdas supports the view that those words prevent the Commissioner from making an order under section 33, which would fall under section 34 or section 35.'
Kania J. agreed with the above view and added, after referring to the passage from Khemchands case which we have already read :
'Therefore, the contention that the Commissioner had the widest powers as contended for is set at rest by those observations.... The construction of section 33 when read with section 34 and 35 was considered by the Madras High Court and the Rangoon High Court in the two cases referred to by the learned Chief Justice in his judgment and both the courts came to the conclusion that it was not right for the Commissioner while purporting to act under section 33 to override the provisions of section 34. It seems to me clear that if the Commissioner thought that the view of the Appellate Assistant Commissioner was erroneous and a different view should be taken, it was his duty to give directions to proceed under section 34 and it was not within his power himself to act as if under section 34 and reassess on the ground that the rate charged was lower.'
There is the following passage in the judgment of Beaumount C.J. in Commissioner of Income-tax v. Mangaldas Motilal & Co. :
'The Privy Council held in Commissioner of Income-tax v. Khemchand Ramdas, that the powers of the Commissioner under section 33 are restricted by the reason of the words subject to the provisions of this Act by the terms of section 34 and 35, and if the Commissioner desires to enhance the assessment under section 34, he must proceed within the time limited by that section. In Commissioner of Income-tax v. Edulji Dinshaw, this Court held that the Commissioner could not, under section 33, himself enhance the assessment, although we pointed out that he might, under his revisional powers, direct the Income-tax Officer to take proceedings under section 34 for the purpose of enhancing the assessment. In this case, no doubt, the Commissioner has not purported himself to enhance the assessment. He could not have directed the Income-tax Officer to take proceedings under section 34, because the proceedings would have been out of time. What he has done is merely to direct the Income-tax Officer to proceed from the point at which notice was given under the old assessment and to make a new assessment, and I agree with the Commissioners argument that there is nothing in the terms of section 33 to prevent such an order being made. The Commissioner is doing something which the Assistant Commissioner might do in appeal within the time limited under section 31. But, to my mind, one cannot ignore the effect of the Commissioners order. As I have already pointed out, it is obvious that the order is intended to result in the assessment as passed by the Assistant Commissioner being enhanced. If that is done, then the Commissioner has done exactly what the Privy Council, and this court in the cases I have referred to, decided that he could not do, and he has in fact caused the assessment to be enhanced without regard, and contrary to the provisions of section 34. In my opinion he cannot do that.'
All these High Courts have referred to the Privy Council decision in Khemchands case and it will be useful to extract another passage from that decision :
'The Commissioners power under section 33 can only be exercised subject to the provisions of the Act of which the provisions in section 34 and 35 are in this respect of the greatest importance. Those sections are or were at the material time as follows :
34. If for any reason income, profits or gains chargeable to income-tax has escaped assessment in any year, or has been assessed at too low a rate, the Income-tax Officer may at any time within one year of the end of that year, serve on the person liable to pay tax on such income, profits or gains, or, in the case of a company, on the principal officer thereof, notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or reassess such income, profits or gains, and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section :
Provided that the tax shall be charged at the rate at which it would have been charged had the income, profits or gains not escaped assessment or full assessment, as the case may be.
35. (1) The Income-tax Officer may, at any time within one year from the date of any demand made upon an assessee, on his own motion rectify any mistake apparent from the record of the assessment, and shall within the like period rectify and such mistake which has been brought to his notice by such assessee :
Provided that no such rectification shall be made, having the effect of enhancing an assessment unless the Income-tax Officer has given notice to the assessee of his intention so to do and has allowed him a reasonable opportunity of being heard.
(2) Where any such rectification has the effect of reducing the assessment, the Income-tax Officer shall make any refund which may be due to such assessee.
(3) Where any such rectification has the effect of enhancing the assessment, the Income-tax Officer shall serve on the assessee a notice of demand in the prescribed form specifying the sum payable, and such notice of demand shall be deemed to be issued under section 29, and the provisions of this Act shall apply accordingly.
In view of these express provisions of the Act, it is in their Lordships opinion quite impossible to suppose that the Income-tax Officer may in every kind of circumstance and after any lapse of time make fresh assessments or issue fresh notices of demand' or that the Commissioner can direct him so to do. In their Lordships opinion the provisions of the two sections are exhaustive, and prescribe the only circumstances in which and the only time in which such fresh assessments can be made and fresh notices of demand can be issued.'
The sections of the Indian Income-tax Act extracted in the passage just quoted, it will be seen, are in material respects, identically worded as sections 35 and 36 of the Act.
The effect of the additions to section 35 of the Act in the form of the second proviso to sub-section (1) of section 35 and the whole of sub-section (2) of that section corresponding to which there are no provisions in section 34 of the Indian Income-tax Act, 1922, when the above decisions were rendered, has now to be considered. The second proviso to sub-section (1) does not affect the question arising for decision. It is only an additional restriction to that provided by sub-section (1) and provides that the Income-tax Officer shall not issue the notice contemplated by the sub-section unless he has recorded his reasons for doing so. Sub-section (2) provides that no assessment under section 18 or assessment or reassessment under sub-section (1) of section 35 shall be made after the expiry of three years from the end of the year in which the agricultural income was first assessable. The first proviso to sub-section (2) is an exception to this restriction and enables an assessment order being made even beyond the said three years, provided a notice as contemplated by sub-section (1) had been issued within the time limited by that sub-section. This proviso thus enlarges the period within which the assessment order should be passed and the period so enlarged is one year from the date of service of notice under sub-section (1) of section 35.
We are left with the second proviso to sub-section (2) of section 35 and on behalf of the revenue reference was made to the decision of Isaac J. in Ishwara Bhat v. Commissioner of Agricultural Income-tax. The relevant passage in the judgment dealing with the proviso runs thus :
'From the second proviso to sub-section (2), it is clear that the limitation prescribed by this sub-section would not apply to reassessment made under section 19 or to an assessment or reassessment made in consequence of, or to give effect to any finding or direction contained order under section 31, 32, 34 or 60. This shows that the power of the Commissioner under section 34 is not subject to the period of limitation prescribed in sub-section (2), and that the Income-tax Officer also can make a reassessment pursuant to a direction made by the Commissioner under section 34 of the Act irrespective of any period of limitation. The cases relied on by the petitioners learned counsel were decided before the Act 12 of 1964 was enacted. The plea to limitation cannot therefore, succeed.'
With great respect, it has to be pointed out that the second proviso to sub-section (2) of section 35 has made no such provision. All that the proviso enacts, among other things, is that nothing contained in the section limiting the time within which any action may be taken or any order of assessment or reassessment may be made shall apply when action is taken to give effect to any direction under section 34. The action to be taken under section 35 is by the Agricultural Income-tax Officer. He must first issue notice and then himself assess or reassess. The second proviso does not purport to deal with any action that can be taken by the Commissioner under section 34. The action that can be taken by the Commissioner under that section is only subject to the provisions of the Act and this is clear from section 34 itself. The proviso does not purport to enlarge the power of the Commissioner. It only removes the restrictions so far as action by the Agricultural Income-tax Officer is concerned, if the Commissioner had, acting under section 34, subject to the provisions of the Act, given a proper and valid direction. The action of the Commissioner must be subject to the provisions of the Act; any direction he gives must be before the expiry of the time within which a notice can be issued by the Agricultural income-tax Officer under section 35 of the Act. Only such a direction will be a valid direction and it has been emphasised in the decisions already referred to that the commissioner cannot give any valid direction after the expiry of the period. This is clear from all the decisions Commissioner of income-tax v. Hajee Ibrahim Kassam (37 Cochin Law Reports 409 (F. B.)), Suppan Chettiar v. Commissioner of Agricultural Income-tax (1958) K. L. J. 834 (Ker.). Commissioner of Income-tax v. Sheik Abdul Kadir Maracayar (1928) A. I. R. 1928 Mad. 257 (F.B.). Commissioner of Income-tax v. Ved Nath Singh (1940) 8 I. T. R. 222 (Rang.), Commissioner of Income-tax v. Edulji Dinshaw (1943) 11 I. T. R. 340 (Bom.) and Commissioner of Income-tax v. Mangaldas Motilal (1944) 12 I. T. R. 89(Bom.) and there are specific statements in the Full bench decision of the Cochin High Court and the decision of the Rangoon and Bombay High Courts to the effect that the direction by the Commissioner must be within the period within which notice should be issued by the assessing authority. The passage in the Cochin decision is in these terms :
'That he (Commissioner) cannot himself pass an order which according to the Act has to be passed by another officer, though he can give directions in that behalf consistently with the provisions of the Act, that in making his order under the section he cannot himself override, nor can he direct or allow the subordinate officer to override any of those provisions.'
Robert C.J. expressed the same view as follows in Commissioner of Income-tax v. Ved Nath Singh :
'The Commissioner cannot, by purporting to act under section 33 of the Act, take action under section 34, although he can, if the time within which such action must be taken has not expired, direct the income-tax Officer to take such action.'
Beamount C.J. concurred with this view, as is evident from the following passage in Commissioner of Income-tax v. Mangaldas Motilal & Co. :
'.... the powers of the Commissioner under section 33 are restricted by reason of the words subject to the provisions of the Act, by the terms of sections 34 and 35, and if the Commissioner desires to enhance the assessment under section 34, he must proceed within the time limited by that section.'
The intention as gatherable from the words used is only to remove the fetter imposed by the section on the Agricultural Income-tax Officer once a valid and proper direction has been given by the Commissioner under section 34 of the Act. It must be remembered that the provision is what is contained in the proviso to a section and the proviso cannot be interpreted to wipe out the section, and what is more a part of another section.
Nothing in the second proviso to sub-section (2) of section 35 purports to affect in any manner the power of the Commissioner; certainly it does not enlarge his powers to any extent. When a valid direction has been given by the Commissioner, the Proviso will come into operation and the Agricultural Income-tax Officer is, thereafter freed from the restriction imposed by the section, viz., the necessity to issue a notice under section 17(2) within three years of the year during which the income was assessable and the necessity to pass an order of reassessment within the time stipulated.
The Commissioners order in this case is dated August 23, 1967, long after the expiry of three years of the end of the second of the two years concerned. The Commissioner at the time he gave the direction that the Agricultural Income-tax Officer will dispose of the matter afresh could have given no such direction under section 34 of the Act as he should have acted with regard to the first of the years before March 31, 1963, and with regard to the second, before March 31, 1964.
Though the order dated August 23, 1967, purports to set aside the assessment also and directs a fresh disposal, it has to be understood as containing a direction to take action under section 35 to assess or reassess income that had escaped assessment. This should have been done if at all within the dates mentioned above. The Commissioner has, therefore, acted without jurisdiction and the question referred to us has to be answered in the negative, that is, in favour of the assessee and against the department. We do so. In the circumstances of the case, we direct the parties to bear their cost.
RAMAN NAIR C.J. - Left to my own resources, uninfluenced by the authorities, I would have been disposed to say this. Every case of income escaping assessment - and in the light of the decision of the Supreme Court in Maharajadhiraj Sir Kameshwar Singh v. State of Bihar, I concede that the present case is such a case - is necessarily a case of error in the original assessment, whether this be due to the assessing authority, namely, the Income-tax Officer, not having all the materials before him or to his reaching a wrong conclusion on the materials. This error in the assessment proceeding, section 34 authorities the Commissioner to correct (of course, only after giving the assessee a reasonable opportunity of being heard) without any limitation as to time and after making such enquiry as he thinks fit which means that he can gather fresh material and is not confined to the record of the proceeding. He may, subject to the provisions of the Act, pass such orders as he thinks fit which I should have thought means that he may do what the Income-tax Officer ought to have done is making the original assessment, namely, make an assessment in accordance with the provisions of the Act, taking the escaped income also into account. Or, he may ask the Income-tax Officer to do so. In so doing, it is the original order of assessment he is revising, not the exercise or non-exercise by the Income-tax Officer of his power to correct his own order of assessment under section 35. The Commissioner is in no sense exercising the powers of Income-tax Officer under section 35, but only that officers power to make the original assessment. That being so it is difficult to understand how the Commissioners power of revision can be affected by the limitations imposed by section 35, any more than the powers of an appellate or revisional court are affected by any limitation that might be placed on the powers of the court of first instance to review its own decisions. But, if the Commissioner directs the Income-tax Officer to rope in the escaped income, the latter can do that only under section 35 and subject to the limitations imposed by that section. That, it seems to me, was all that was decided by the Privy Council in Commissioner of Income tax v. Khemchand Ramdas :
Overborne by the formidable array of authorities (and like them obsessed by the unfairness of allowing the Commissioner to impose an additional burden on the assessee even after an unreasonable length of time), I am prepared to hold that, acting under section 34, the Commissioner has no power to assess the escaped income himself and can only direct the Income-tax Officer to do so in exercise of the latters powers under section 35. That exercise can, of course, be only in compliance with the requirements of the section. That is as far as the authorities go. I do not understand them to say that there is as such any time limit for giving such a direction-there is none in section 35 or elsewhere. But the Commissioner can act only subject to the provisions of the Act; he cannot direct the Income-tax Officer to act is disregard of the provisions of section 35. Therefore, if his direction is to be effective, it must be given well within the time allowed to the Income-tax Officer by section 35; if the direction requires the Income-tax Officer to do what he cannot do under section 35, then the direction would be bad and liable to be quashed; and that is what the authorities mean when they say that the Commissioner must act within the time allowed by section 35. It is here that the second proviso to sub-section (2) of section 35 (newly introduced by way of amendment) comes in. It says that the limitations of time imposed by the section for action by the Income-tax Officer shall not apply to an assessment or reassessment made in compliance with the direction under section 35 (sic 34). (Thus the proviso in terms contemplates a direction under section 34 that action be taken under section 35; and that concludes any arguments based on the Supreme Court decisions under the sales tax statutes, which contain no such provision, that such a direction is beyond the scope of section 34). And that means that once there is a direction in that behalf under section 34 (which direction can, on the plain language of the section, be given at any time) the Income-tax Officer can proceed to assess the escaped income at any time. There is no such provision in any the statutes considered in the decisions cited and the amendment was obviously for the purpose of getting round those decisions.
I would answer the question referred to us in the affirmative, that is, against the assessee.
I might add that the assessee has no case that the Commissioner did not act within a reasonable time. Therefore, the question whether the principle laid down in State of Gujarat v. Patel Raghava Nath has any application here does not arise for consideration.
BY THE COURT
In accordance with the majority judgment the question referred is answered in the negative, that is, in favour of the assessee and against the department. No order as to costs.
Question answered in the negative.