JUDGEMENT
The judgement of the court was delivered by
VENKATADRI J. - The Tribunal has submitted a statement of the case, directed under section 66(2) of the Indian Income-tax Act, and the statment of the case discloses the following facts :
The assessee, Naganatha Iyer, is a member of a Hindu undivided family consisting of himself, his father, Narayanaswsami Iyer, and his brother, Ganapathy Iyer. The family was carrying on business in rice-mill fire-wood, oil-cake and soap-nut power at Tiruchirapalli. In February, 1941, the assessee entered into a partnership with one Manickam and carried on business under the name and style of 'Andhra Trading Company'. The firm traded in fire-wood and oil-cake and also plied lorries for hire. The business of the firm was also carried on at Tiruchirapalli. For the assessment year 1942-43, which was the very first year of assessment for the firm, the share income from the said firm was returned by the assessee as his separate income. The Hindu undivided family, of which the assessee is a member, also filed return. The assessee claimed that he was carrying on the partnership business in the Andhra Trading Company in his individual capacity, and the firm had nothing to do with the Hindu undivided family. His father, Nrayanaswami Iyer, also wrote a letter to the Income-tax Officer stating that he had no claim to the income form the Andhra Trading Company, as it belonged exclusively to his son, the assessee. The Income-tax Officer, after making enquires, satisfied himself that the share income from the firm represented the individual income of the assessee, and accordingly separately assessed it in the hands of the assessee for the assessment years 1942-43, 1943-44 and 1944-45. But, in the assessment for the year 1945-46, the Income-tax Officer came to the conclusion, on the basis of conduct of the parties and the entries in the account books of the family business and those of the Andhra Trading Company, that the assessee was a partner in the firm on behalf of himself and the other members of the family, and, therefore, his share income from the firm was included in the return of the undivided family. Narayanaswami Iyer, the father of the assessee and the karta of the Hindu undivided family, filed an appeal against such inclusion of his sons individual income in the return of Hindu undivided family. The Appellate Assistant Commissioner did not accept the contention of the father, and, on dismissal of his appeal, he filed a further appeal to the Tribunal where also he was unsuccessful. Finally, the family moved this court under section 66(2) of the Act and the High Court directed the Tribunal to state the case on the question of inclusion of the share income of the assessee in the come of the family, consisting if the assessee, his father and his brother. The High Court finally answereed the reference in favour of the Hindu undivided family : Narayanaswami Iyer v. Commissioner of Income-tax. This decision was rendered on 12the December, 1955.
During the pendency of that reference in this court, the assessee, as usual, submitted his respect of his share income in the said firm for the assessment year 1948-49 and 1949-50. The Income-tax Officer ignored these returns and did not take any steps to assess the assessee on the basis of these returns.
The Income-tax Officer issued a notice on 17th March, 1953, under section 34(1)(a) of the Act, requiring the assessee to file his return for the assessment year 1948-49. The assessee submitted that the return for 1948-49 was already filed before the Income-tax Officer on 8th March, 1949, and that it was not lawful to ignore the return and resort to the provisions of section 34(1)(a) of the Act. However, the assessee filed a copy of the return under protest. The assessment was completed on 13th March, 1954. Again for the assessment year 1949-50, the Income-tax Officer issued a notice under section 34 of the Act on 16th March, 1954, and the assessee filed a return under protest though he had filed one in the ordinary course on 25th April, 1950. The officer completed the assessment on 7the May, 1954. In both the cases, the officer made the assessment on the assessee by adopting the income from the firm as his individual income. It may be noted that the same items of income had been assessed on the Hindu undivided family, rejecting the assessees claim that the income was not that of the Hindu undivided family.
The assessee preferred appeals to the Appellate Assistant Commissioner and contended that he had already filed the returns, that the Income-tax Officer was not justified in ignoring them and invoking the provisions of section 34(1)(a) of the Act and that the assessments made on 13th March, 1954, and 7th May, 1954, were barred by limitation, as four years had expired from the end of the relevant year of assessment. The Appellate Assistant Commissioner upheld the action of the Income-tax Officer under section 34. He was of the view, however that the case came under the provisions of section 34(1)(b). Finally, he set aside the orders of the Income-tax Officer, to enable him to re-work the income of the assessee accoring to law.
There were further appeals to the Tribunal, objecting to the validity of the assessments under section 34(1)(a) of the Act. The Tribunal held that the appeal had become otiose, as the Appellate Assistant Commissioner had vacated the assessments appealed against.
Thereafter, the Income-tax Officer, in accordance with the order of the Appellate Assistant Commmissioner, made fresh assessments for the two years, viz., 1948-49 and 1949-50, on 22nd January, 1957. Aggrieved with the assessment made, the assessee preferred appeals to the Appellate Assistant Commissioner, once again contending that the whole proceedings initiated under section 34(1)(a) were illegal and void, inasmuch as the returns of his individual income had been submitted already and that no action was taken thereon. He further contended that when once the Appellate Assistant Commissiner came to the conclusion that section 34(1)(a) was not applicable, he should not have given directions to re-work the assessment under section 34(1)(b), and that, in any event, there being no assessment under section 34(1)(b) within four years from the end of the end of the year of assessment, the Appellate Assistant Commissioner could not in law enlarge the period of limitation prescribed by the statute by purporting to act under the proviso to section 34(3). The Appellate Assistant Commissioner, with regard to the assessment for the year 1948-49, referred to the earlier decision of his predecessor and held that the point could not be considered in that appeal. However, in regard to the quantum, the Appellate Assistant Commissioner gave some relief. The appeal for 1949-50 was dismissed as withdrawn.
The assessee preferred further appeals to the Income-tax Appellate Tribunal and contended that the assessments made under section 34 were time-barred and illegal, that the assessee having himself field the returns, there was no question of notice either under section 22(2) or section 34 and that section 34(1) could be invoked only when there had been escapement of income and consequent failure on the part of the assessee. The Tribunal rejected all these contentions of the assessee and confirmed the order of the Appellate Assistant Commissioner.
Now, on the request of the assessee, who failed before the Tribunal to refer the case to this court, this court directed the Tribunal to state a case on the question whether the assessment under section 34 of the Act was lawful. The reference, therefore, involves the true construction of section 34 of the Income-tax Act. Lord Normand, while considering the scope of section 34, delivered his opinion thus in Commissioner of Income-tax v. Mahaliram Ramjidas :
'The section, although it is part of a taxing Act, imposes no charge, on the subject, and deals merely with the machinery of assessment. In interpreting provisions of this kind rule is that that construction should be preferred with makes the machinery workable, it res valeat potiues quam pereat.'
Therefore, this section gives power to the Income-tax Officer to take proceedings, when the assessee did not disclose fully the total income in his return or did not reveal the sources of income or did not submit a voluntary return of income under section 22(1) or when income, profits or gains chargeable to tax is omitted or has been under-charged, and he has reason to believe in consequence of information that the income has escaped assessment or full assessment. Section 34 is intended to vest in the Income-tax Officer a power to amend the assessment, when he has reason to believe that any income, profits or gains chargeable to income-tax have escaped assessment for any year, and, in a such a case, he may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowances. Before he exercises his power, he should have some material to form his opinion that the assessee suppressed the relevant facts to escape assessment, or that he himself inadvertently omitted to consider a fact or point of law. The burden of proof is on the department to show that the income has escaped assessment, and it is not for the assessee to prove the contrary. In a proceeding under section 34, the Income-tax Officer is only dealing with the extra income, which has not been assessed to income-tax. He has no jurisdiction to make a new assessment.
Section 34 deals with two cases of escaped assessment; clause (a) of section 34(1) deals with a case where there is an omission or failure on the part of the assessee to make a return, and clause (b) deals with a case where, even without there being an omission or failure on the part of the assessee, the Income-tax Officer receives certain information with regard to income. having escaped assessment. Thus, two conditions are necessary before proceeding can be taken under this provision. In this case, the assessee had submitted a return, but the department ignored his return and did not take steps to assess his income. It cannot be said that the officer had reason to believe that the income escaped assessment in the relevant assessment Year.
What is meant by 'escaped assessment' was explained in Rajendranath Mukherjee v. Commissioner of Income-tax. In that case, when one Burn & Co. filed to the income-tax authorities, they made an assessment including it in the income of Martin & Co. Subsequently, Martin & Co. disputed the action of the income-tax authorities in legal proceedings. The High Court directed the tax authorities to eliminate the income of Burn & Co. in the assessment of Martin & Co. When the taxing authorities began to take action on the individual income of Burn & Co., they objected that the authorities should have then proceedings under section 34. Lord Macmillan, who delivered the opinion, observed at page 77 :
'To say that the income of Burn & Company which... was returned for assessment and which was accepted as correctly returned, though it was erroneously included in the assessment of Martin & Company, has escaped assessment... seems to their Lordships an inadmissible reading. The fact that section 34 requires a notice to be served calling for a return of income which has escaped assessment strongly suggests that the income which has already been duly returned for assessment cannot be said to have escaped assessment within the statutory meaning.'
In the instant case, it is common case that the assessee made a return for the assessment years in question. But the department was hesitant to assessee him individually, as it was of opinion that this income should have been included in the return made by the joint family, of which he was a member. In Mannalal Modi v. Commissioner of Income-tax, when the assessee filed a return of his income, as an individual, it was transferred to the office who was dealing with the return of the family income of the assess. Subsequently, it was found that there was partition in the family. The Income-tax Officer issued a fresh notice under section 34 calling upon him to file the return. He objected that he had already submitted his return. The question for consideration was whether the assessment under section 34 was valid. The learned judges observed at page 41 :
'... the assessment proceedings had not come to an end. The return was still pending. Whether it was pending before the territorial Income-tax Officer or the Income-tax officer, Special Circle, is immaterial so far as the assessee is concerned. He had filed a return and an assessment could have been made by the department under section 23 in pursuance of that return. Under those circumstances, it cannot be said that the income chargeable to income-tax had escaped assessment, and, therefore, the Income-tax Officer had no jurisdiction to issue a notice under section 34 of the Act.'
The same principle has been followed in Muthiah Thevar v. Commissioner of Income-tax. There the a assessee submitted a return for the assessment year 1944-45, in response to a notice under section 34 of the Act. He also submitted a return for the assessment year 1945-46. The Income-tax Officer took no action on the return of 1945-46. Later, the officer issued a notice of reassessment under section 34. The assessee objected and stated that he had already submitted his return for the year 1945-46. Admittedly, the officer had not made any assessment for that year. It was held that the Income-tax Officer was not entitled proceedings under section 34 of the Act. Reliance was placed on Commissioner of Income-tax v. Ranchhoddas Karsondas. The facts of that case are these. The assessee made a return in 1950 that his assessable income for the assessment year 1945-46 was only Rs. 1,935 with a foot-note that his wife had sold old ornaments and deposited the sum of Rs. 59,026 in the firm in which he was a partner. The department ignored this return and did not act on that. The department issued a notice purporting to be under section 34 of the Act calling upon the assessee to submit his return. The assessee submitted a similar return showing the same income and adding the same foot-note. The Income-tax Officer included the sum of Rs. 59,026 in the total income of the assessee and assessed him on it for the assessment year 1945-46. The assessee disputed the assessment, and finally, when the matter went to the Superman Court, their Lordships agreed with the High Court of Bombay that notice under section 34 was necessary only if, at the end of the assessment year, no return had been made by the assessee and the authorities wished to proceed under section 22(2), but, where the assessee himself chose voluntarily to made a return, no question could arise under section 34 of assessment escaping and, therefore, there was no necessity to server any notice under section 34. Their Lordships further observed at page 576.
'There is nothing to prevent the Income-tax Officer from taking up the return and proceeding to assess the income of the assessee. It was open to him, if there was sufficient justification for it, to hold that the amount noted in the foot-note was really the assessees income, in which case an assessable income would have been found and the tax could be charged thereon. If the Income-tax Officer had acted on that return and assessed the assessee before 31st March, 1950, the assessment would have been valid. He chose to ignore the return, and served on the assessee a notice under section 34(1). This notice was improper, because with the return already filed, there was neither an omission nor a failure on the part of the assessee nor was there any question of assessment escaping. The notice under section 34(1) was, therefore, invalid and the consequent assessment equally so.'
Therefore, when a return has been filed but no assessment has been made, it cannot be said that the income escaped assessment, so as to confer a jurisdiction on the Income-tax Officer to invoked the aid of section 34. Once we come to the conclusion that the whole proceeding initiated by the Income-tax officer under section 34 is void of jurisdiction, the assessment certainly cannot be maintained in law. The assessment cannot also be said to be in accordance with law or binding on the assessee.
It was further contended by learned counsel for the a assessee that, when the Appellate Assistant Commissioner directed the Income-tax Officer to take proceedings under section 34(I)(b) while setting aside the orders passed by the Income-tax Officer in pursuance of the notice issued under section 34, the direction itself was illegal and irregular. To support his proposition, he drew our attention to the decision in Commissioner of Income-tax. v. N. Veeraswami Chettiar, to which one of us was a party. In that case, the Income-tax Officer passed orders on the assessee who was a shareholder in a company that he became assessable to tax on the basis of the deemed distribution of dividends, before any order was made on the company under section. 23A. On appeal by the assessee, the order was set aside on the ground that there was no information upon which any escape of income could be founded. Subsequently, when final orders were passed on the company, the officer made a further order of assessment on the assessee under section 34 but without notice. Again, when the assessee filed an apple, the Appellant Assistant Commissioner cancelled the reassessment and, while passing the order, stated that the officer could proceed under section 34 to include, the dividends in the hands of the shareholder. The assessee again objected, and finally, when the matter came to this court, it was held at page 22 :
'But in a proceeding for reopening an assessment and making a reassessment under section 34, the Income-tax Officer acquires Jurisdiction in a particular manner and it is open to the appellate authority to make a direction which would have the effect of conferring jurisdiction in a case when such jurisdiction has not been properly acquired by the Income-tax Officer. From the words of the section itself, it is seen that no authority other than the Income-tax Officer has jurisdiction under section 34 of the Act. If the present case had been one where the inititation of the proceedings had been validly launched, it would be open to the Appellate Assistant Commissioner in appeal before him, while setting aside the assessment, to issue directions. But it is unthinkable that a direction can be made in the exercise of the powers under section 31 of the Act which goes to the extent of conferring jurisdiction upon the Income-tax Officer if he is not lawfully seized of jurisdiction. To our minds, the direction issued by the Appellate Assistant Commissioner travels far beyond the scope of section 31 of the Act in the circumstances of the case. If the direction is neither lawful nor valid, it cannot come within the scope of the saving proviso and serve to remove the bar of limitation.'
Relying on this principle, we are of opinion that the direction given by the Appellate Assistant Commissioner while setting side the order of assessment, that the Income-tax Officers should invoke the provisions of section 34(1)(b), and the action of the Income-tax in reassessing the income is neither lawful nor valid. The proceeding under section 34 initiated by the Income-tax Officer even in the first instance is wholly void, irregular and illegal.
It was next contended by learned counsel for the department that, once the assessee himself withdrew the appeal for the year 1949-50 before the Appellate Assistant Commissioner, he could not raise the objection either before the Tribunal or before us that the proceedings initiated by the department for reassessment under section 34 was invalid. But on a close scrutiny of the record, we find that the assessee by his letter dated July 8, 1957, to the Appellate Assistant Commissioner has only withdrawn the objection in regard to the estimated income for the year 1949-50. We are also of opinion that the Tribunal committed an error, in coming to the conclusion that the assessee did not raise the contention in the grounds of appeal that he never gave up the legality of the assessment for the year 1949-50. Here again, we have seen the copy of the enclosrue to the grounds of appeal before the Tribunal, wherein he has stated specifically that the was withdrawing only the objection regarding the estimated income. There was no request to withdrawn the appeal in relation to the legality of the assessment. It is hardly likely that it would have been withdrawn, for the assessee had succeeded in establishing that this income was not includible in the income of the Hindu undivided family, in the reference to this court relating to 1945-46. Therefore, we feel that the assessee is entitled to claim before us that the action of the Income-tax Officer in reassessing his income for 1949-50 under section 34 of the Act is invalid.
For the reasons stated above, we answer the question in the negative and hold that, on the facts and circumstances of the case, the assessment under section 34 of the Act is not lawful. The assessee is entitled to his costs. Counsels fee Rs. 250
Question answered in the negative.