Hungerford Investment Trust Ltd. Vs. Income Tax Officer and ors. - Court Judgment

SMT. SUJATA V. MANOHAR, J. :

The appellant, M/s. Hungerford Investment Trust Ltd. was, at all material times, a non-resident company having its registered office at Singapore. The appellant-company owned 100 per cent shares in M/s. Turner Morrison & Co. Ltd. which was a company incorporated in India.

The present appeals are concerned with asst. yrs. 1949-50, 1950-51 and 1951-52.

2. An order under s. 23A of the IT Act, 1922, before its amendment in 1955 was passed by the ITO in the case of M/s. Turner Morrison & Co. Ltd. as a result of which the undistributed portion of the assessable income of M/s. Turner Morrison & Co. Ltd. was deemed to have been distributed as dividends among its shareholders for asst. yrs. 1949-50, 1950-51 and 1951-52. The dividend deemed to have been so received by the appellant-company as shareholder for the asst. yrs. 1949-50, 1950-51 & 1951-52 was sought to be subjected to income-tax by the ITO under s. 34 of the IT Act, 1922. In the past, an assessment had been made on M/s. Turner Morrison & Co. Ltd. as agents for the appellant-company on a total income which was returned as nil. In view of the above order under s. 23A, the ITO sought approval of the CIT under s. 34 to tax the appellant-company as an assessee in respect of asst. yrs. 1949-50, 1950-51 & 1951-52.

After obtaining approval of the CIT under s. 34, the ITO issued a notice for the asst. yr. 1949-50 to M/s. Turner Morrison & Co. Ltd. as agents of the appellant-company on 24th March, 1954. A return was filed pursuant to the notice by M/s. Turner Morrison & Co. Ltd. as agents of the appellant-company for the asst. yr. 1949-50. The status of the company in the return was described as non-resident and the income was the dividend deemed to be received under s. 23A by the appellant-company from M/s. Turner Morrison & Co. Ltd. on 29th October, 1954. The ITO made an assessment and issued a demand notice on M/s. Turner Morrison & Co. Ltd. as agents of the appellant non-resident company.

For the asst. yrs. 1950-51 and 1951-52, the ITO, after obtaining approval from the CIT to issue a notice under s. 34 on the appellant-company as the assessee, issued notices dt. 11th February, 1955, on the appellant-company. On 16th February, 1955, returns were filed by the appellant-company. The residence was shown as at Singapore. The returns were accompanied by a covering letter from M/s. Turner Morrison & Co. Ltd. as agents on behalf of the appellant-company. On 25th February, 1955, the ITO made an assessment and issued a demand for asst. yrs. 1950-51 and 1951-52 on M/s. Turner Morrison & Co. Ltd. as agents of the appellant-company.

Thereupon M/s. Turner Morrison & Co. Ltd. challenged the assessment orders so made for the three assessment years before the AAC. The AAC, by his order dt. 29th November, 1960, held that the ITO had validly initiated proceedings for asst. yrs. 1950-51 and 1951-52 on the appellant-company. However, he failed to make an assessment on the appellant-company directly and made an assessment on M/s. Turner Morrison & Co. Ltd. as agents of the appellant. He held that such an assessment on the agent of a non-resident company was barred by limitation in the present case under the second proviso to s. 34(1) of the IT Act, 1922. He directed the ITO to make a fresh assessment on the appellant-company on the basis of the valid returns already furnished by the appellant-company. In respect of asst. yr. 1949-50, the AAC held that the notice had been issued within the period of limitation. However, the proceedings should have been taken against the appellant-company directly. He, therefore, directed the ITO to make a fresh assessment on the appellant-company from the stage of notice.

Accordingly, on 26th October, 1961, three notices were issued on the appellant-company by the ITO for the three assessment years. The appellant-company challenged these notices by filing a writ petition before the Calcutta High Court being Writ Petition No. 1/1962. A learned Single Judge of the Calcutta High Court by his order dt. 31st January, 1972, dismissed the writ petition, holding that the assessment proceedings against the appellant-company were validly commenced by notices dt. 26th October, 1961. The appeal of the appellant-company before a Division Bench of the Calcutta High Court was also dismissed by its judgment and order dt. 13th August, 1982. Hence, the present appeals have been filed before us.

3. The appellant-company contends that the AAC had no jurisdiction to give directions under s. 31 to the ITO to make the assessments on the appellant-company. Therefore, the notices which have been issued against the appellant-company on 26th October, 1961, are beyond the period prescribed by s. 34 of the IT Act, 1922. According to the appellant-company, since the direction given by the AAC is not covered by s. 31, the second proviso to s. 34(3) lifting the embargo of limitation in such cases is not attracted.

The AAC by his order dt. 29th November, 1960, gave the following directions :

'In view of the various reasons discussed above, the assessment for 1949-50 made by the ITO on the resident company M/s. Turner Morrison & Co. Ltd. as agents of the non-resident company M/s. Hungerford Investment Trust Ltd. in order to tax the deemed dividend under s. 23A is set aside and the ITO is directed to make a direct assessment on the non-resident company ... and, therefore, the ITO is directed to make the assessment direct on the non-resident company to tax the deemed dividend under s. 23A. In connection with the assessment for 1950-51 and 1951-52 ... the notices under s. 34 were validly issued taking the assessee as non-resident company directly and the returns of income were also submitted showing the assessee as non-resident company and, therefore, the proceedings are set aside from the stage of issue of notice under s. 23(2) and the ITO is directed to make the assessment on the non-resident company after giving fresh opportunity to the assessee under s. 23(2).'

Pursuant to these directions the ITO has issued two notices dt. 26th October, 1961, in respect of asst. yrs. 1950-51 and 1951-52 on the appellant-company under s. 23(2) of the IT Act, 1922. The ITO has also issued a notice dt. 26th October, 1961, on the appellant-company under s. 34 of the IT Act for the asst. yr. 1949-50.

4. Under s. 34(1)(a) of the IT Act, 1922, if the ITO has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under s. 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to income-tax has escaped assessment for that year, or has been underassessed, etc., as set out therein, the ITO can serve on the assessee a notice and proceed to assess or reassess such income. Similarly, under s. 34(1)(b), notwithstanding that there has been no omission or failure as mentioned in cl. (a) on the part of the assessee, if the ITO has, in consequence of information in his possession, reason to believe that income chargeable to income-tax has escaped assessment for any year, or has been underassessed he can serve on the assessee a notice and proceed to assess or reassess such income as specified in that section. The period prescribed at the material time for issuing notice was eight years in the cases falling under s. 34(1)(a) and four years for cases falling under s. 34(1)(b). The second proviso to s. 34(1), at the material time, provided that the ITO shall not issue a notice after the expiry of two years from the relevant assessment year if the person on whom the assessment or reassessment is to be made in pursuance of the notice is a person deemed to be the agent of a non-resident person under s. 43.

The second proviso to s. 34(3), however, at the material time provided as follows :

'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 s. 27 or to an assessment or reassessment made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under s. 31, s. 33, s. 33A, s. 33B, s. 66 or s. 66A.'

This is how the second proviso to s. 34(3) stood after its amendment in 1953 by the IT (Amendment) Act of 1953 w.e.f. 1st of April, 1952. The appellant-company contends that this proviso has no application in the present case because the direction given by the AAC under s. 31 is a direction to assess a stranger to the assessment proceedings against M/s. Turner Morrison & Co. Ltd. and hence, it is not covered by the second proviso to s. 34(3).

5. Since the impugned notices are dt. 26th October, 1961, and pertain to asst. yrs. 1949-50 to 1951-52, it is clear that, but for this proviso, the notices would be beyond the period prescribed under s. 34 of the IT Act, 1922. The second proviso to s. 34(3) lifts the bar of limitation when, inter alia, an assessment or reassessment is made on an assessee or any person in consequence of or to give effect to any finding or direction contained in an order under s. 31.

6. In the present case the original assessment orders were made on M/s. Turner Morrison & Co. Ltd. as agents of the appellant-company. The order of the AAC giving directions to assess the appellant-company was passed in the appeals of M/s. Turner Morrison & Co. Ltd. against the orders of assessment for the said three assessment years. Can the appellant-company on whom the notices have been issued pursuant to the AACs order and directions of 29th November, 1960, come within the scope of phrase 'the assessee or any person' in respect of whom any direction can be given under s. 31 ?

7. The scope of this second proviso to s. 34(3) was examined by a Constitution Bench of this Court in the case of S. C. Prashar & Anr. vs. Vasantsen Dwarkadas & Ors. (1963) : [1963]49ITR1(Bom) : [1963]49ITR1(Bom) (SC) . This Court, examining the second proviso to sub-s. (3) of s. 34 which came into effect from 1st April, 1952, said that it patently introduced an unequal treatment in respect of some out of the same class of persons. Those whose liability to pay tax was discovered by one method would be proceeded against at any time and no limitation would apply in their case and in the case of others the limitation laid down by sub-s. (1) of s. 34 would apply. Referring to the distinction made by the High Court in that case on a somewhat narrower ground, this Court observed that so far as assesses were concerned, there might be a rational ground of distinction because appeal proceedings, etc., might take a long time and the assessee being a party to the appeal could not complain of such delay. Therefore, an assessee did not occupy the same position as strangers. This Court, therefore, held that the proviso, in so far as it affected strangers, us be held to be ultra vires as violating Art. 14 of the Constitution.

8. The same Bench delivered another judgment on the same day in CIT vs. Sardar Lakhmir Singh (1963) 49 ITR 10 in which it affirmed its finding in S. C. Prashars case (supra). In the case of S. C. Prashar (supra), the assessee before the Tribunal was Vasantsen Dwardakas as representing his deceased father. The Tribunal in appeal held that the income in question should be deleted from Dwarkadass income. If the ITO can include the same in the income of the firm of Purshottam Laxmidas (of which Dwarkadas was a partner) he is at liberty to do so. He can then apportion the income of Purshottam Laxmidas amongst the partners thereof as provided in s. 23(5) of the Act. Thereupon the ITO served a notice under s. 34 on the firm of Purshottam Laxmidas. This Court held that the firm of Purshottam Laxmidas was not before the Tribunal and, therefore, the firm was no better than a stranger who was in some way associated with the assessee. Therefore, the second proviso to s. 34(3) would have no application to the firm and the notice under s. 34 which was issued on the firm of Purshottam Laxmidas was barred by limitation.

In the second case of Sardar Lakhmir Singh (supra), the assessee and his father had filed separate returns of income in their individual capacity. But, the ITO amalgamated their income and assessed the total income as the income of the HUF. He did not make any protective assessment with regard to the separate income shown in the return of the assessee. The AAC set aside the assessment of the HUF. Thereafter, the ITO made an assessment on the assessee in individual capacity on the basis of the original return filed by him. This was held to be barred by limitation.

9. In the subsequent case, however, of ITO vs. Murlidhar Bhagwan Das : [1964]52ITR335(SC) : [1964]52ITR335(SC) , a Constitution Bench of this Court considered the ratio laid down in S. C. Prashars case (supra). This Court observed (P. 346) that 'the expression 'any person' in the second proviso to s. 34(3) in its widest connotation may take in any person, whether connected or not with the assessee, whose income for any year has escaped assessment; but this construction cannot be accepted, for the said expression is necessarily circumscribed by the scope of the subject-matter of the appeal or revision, as the case may be. That is to say, that person must be one who would be liable to be assessed for the whole or a part of the income that went into the assessment of the year under appeal or revision. 'If so construed, we must turn to s. 31 to ascertain who is that person other than the appealing assessee who can be liable to be assessed for the income of the said assessment year. A combined reading of s. 30(1) and s. 31(3) of the Act indicates the cases where persons other than the appealing assessees might be affected by orders passed by the AAC. Modification or setting aside of assessment made on a firm, joint Hindu family, AOP, for a particular year may affect the assessment for the said year on a partner or partners of the firm, member or members of the HUF or the individual, as the case may be. In such cases, though the latter are not eo nomine parties to the appeal, their assessments depend upon the assessments on the former. The said instances are only illustrative. It is not necessary to pursue the matter further. We would, therefore, hold that the expression 'any person' in the setting in which it appears must be confined to a person intimately connected in the aforesaid sense with the assessments of the year under appeal'.

Therefore, if the person against whom notices are issued under s. 34 pursuant to a direction given by the AAC under s. 31, is a person intimately connected with the original assessee, the period of limitation will not apply to a notice issued against him under s. 34. He would be covered by the phrase 'assessee or any other person' under the second proviso to s. 34(3).

10. The principle laid down in the above case of Murlidhar Bhagwan Das (supra) was applied by this Court in the case of CIT vs. Ambala Flour Mills : [1970]78ITR256(SC) : [1970]78ITR256(SC) . In that case, an individual Debi Prasad, had submitted the returns in various capacities and had appealed against the order of assessment. The income earned by the assessee was assessed to tax as income of an AOP of which, on the findings of the ITO, Debi Prasad was a member. In making a direction against Debi Prasad, the Tribunal did not exercise its power qua a stranger to the assessment proceedings. Therefore, this Court held that the period of limitation would not be applied. The AAC was competent to set aside the assessment of an AOP and to direct the ITO to assess the members individually.

11. In the case of Estate of Late Rangalal Jajodia vs. CIT : [1971]79ITR505(SC) : [1971]79ITR505(SC) , the return had been filed by one Rangalal Jajodia who died before the assessment order was made. The assessment order showed the name of the assessee as the estate of late Shri Rangalal Jajodia by legal heirs and representatives-these being the son, the (second) wife and her children. No notice, however, was served on the wife. Therefore, in appeal, a necessary direction was given that notice should be given to her and after hearing her assessment should be made. Interpreting the second proviso to s. 34(3) this Court said that she was not a stranger to the assessment, she was not merely intimately connected with the assessment. She was in fact an assessee. Therefore, the second proviso to s. 34(3) would apply.

12. In the case of CIT vs. Mohd. Shakoor Mohd. Bashir : [1973]89ITR57(SC) : [1973]89ITR57(SC) , one Zahur Bux, who was the sole owner of the business, gifted his business to his two sons Mohd. Shakoor and Mohd. Bashir. Zahur Bux died thereafter. The two sons submitted their returns of income in respect of the business. The ITO, however, rejected their returns and proceeded to assess all the heirs of Zahur Bux as an AOP. In appeal, the AAC held that the assessee, namely, the AOP consisting of all the heirs of Zahur Bux was not liable to be taxed in respect of the business. He held that the business had been gifted to two sons, Mohd. Shakoor and Mohd. Bashir. He set aside the order of the ITO but directed him to assess the income from various sources in the hands of the respective persons to whom they arose. The ITO thereafter issued notices to the two brothers. This Court held that the directions which were given by AAC did not fall within the scope of second proviso to s. 34(3) and, therefore, the subsequent notices which were issued by the ITO were barred by limitation. The brothers to whom the business was gifted were strangers to assessment proceedings against the AOP consisting of heirs of Zahur Bux.

13. In the present case, we have to consider whether the appellant-company is a stranger to the assessment proceedings against M/s. Turner Morrison & Co. Ltd., as laid down in the case of S. C. Prashar (supra) or whether the appellant-company can be said to be intimately connected with the assessee M/s. Turner Morrison & Co. Ltd. as laid down in the case of Murlidhar Bhagwandas (supra).

14. The notices for the asst. yrs. 1950-51 and 1951-52 were sent to the appellant-company itself. For the asst. yr. 1949-50, the notice had been sent to M/s. Turner Morrison & Co. Ltd. as agents of the appellant-company. Under s. 42 of the IT Act, 1922 income arising whether directly or indirectly through or from any business in the taxable territories or through or from any asset or source of income in the taxable territories, shall be deemed to be income accruing or arising within the taxable territories; and where the person entitled to the income is not resident in the taxable territories, shall be chargeable to income-tax either in his name or in the name of his agent and in the later case, such agent shall be deemed to be for all the purposes of this Act the assessee in respect of such income. Thus, in view of s. 42, in the present case, there was an option to tax either the appellant-company or its agent M/s. Turner Morrison & Co. Ltd. Therefore, when the initial notices under s. 34 were sent by the ITO in 1954 and 1955, what was sought to be taxed was the income arising in taxable territories of the non-resident appellant-company. For the asst. yrs. 1950-51 and 1951-52, the notice was addressed to the appellant-company. For the asst. yr. 1949-50, the notice was addressed to the agents in India of the appellant-company. But even in respect of the asst. yr. 1949-50, what was sought to be taxed was the appellants income or deemed income arising in India. For the asst. yrs. 1950-51 and 1951-52, the returns were also filed by the appellant-company as an assessee. The status of the assessee was shown as non-resident. It was on the basis of these returns that the ITO proceeded to make an assessment. For the asst. yrs. 1950-51 and 1951-52, however, he made an assessment in the name of M/s. Turner Morrison & Co. Ltd. as agents of the appellant-company. For the asst. yr. 1949-50 the return was filed by M/s. Turner Morrison & Co. Ltd. as agents of the appellant-company. The status of the assessee was shown in the return as non-resident and the income which was shown was deemed dividend accruing to the appellant-company as provided under s. 23A. For the asst. yr. 1949-50, the assessment was made on M/s. Turner Morrison & Co. Ltd. as agents of the appellant-company. Whether we look upon M/s. Turner Morrison & Co. Ltd. as an independent assessee or otherwise, the assessment was clearly in respect of the income of the appellant-company deemed to arise by virtue of s. 23A in India for that assessment year. Therefore, the appellant-company was directly concerned with the assessment proceedings and the appeal arising in those assessment proceedings before the AAC. The AAC directed, for reasons set out in his order, that the assessments should be made on the appellant-company itself and not on it agent. This direction cannot be considered as a direction to assess a stranger. In fact, as the original assessment proceedings pertain to the income of the appellant-company, in any view of the matter, the appellant-company must be considered as intimately connected with the assessment proceedings in which the AAC gave the impugned directions. The appellant-company is, therefore, covered by the expression 'assessee or any person' in the second proviso to s. 34(3).

15. In the case of Murlidhar Bhagwandas (supra), this Court gave illustrations of persons who might be considered as intimately connected with the assessee in the light of s. 30(1) and s. 31 of the IT Act. This Court referred to assessment of a partnership firm which may affect the income of individual partners or the assessment of an AOP which may affect the income of the individual or the assessment of a joint Hindu family which may affect the assessment of members of the Hindu joint family. It, however, made it clear that these instances were only illustrative and not exhaustive.

16. The appellant-company, however, contends that 'any person' in the said proviso would cover only such persons as were referred to by the Court as illustrations in Murlidhar Bhagwandas (supra) because they are also referred to in s. 31(4). We do not see any merit in this contention. Under s. 31(3), in disposing of an appeal the AAC may, inter alia, set aside the assessment and 'direct the ITO to take a fresh assessment after making such further inquiry as the ITO thinks fit or the AAC may direct and the ITO shall thereupon proceed to make such fresh assessment and determine where necessary the amount of tax payable on the basis of such fresh assessment'. Under sub-s. (4) of s. 31, where, as the result of an appeal, any changes are made in the assessment of a firm or AOP or a new assessment of a firm or AOP is ordered to be made, the AAC may authorise the ITO to amend accordingly any assessment made on any partner of the firm or any member of the association. This provision under s. 31(4) cannot be read as limiting the scope of the words 'any person' in the second proviso to s. 34(3) as referring only to those persons who are covered by s. 31, sub-s. (4). The words are wide enough to cover all directions under s. 31 including those relating to the assessment of a person intimately connected with the assessee in the sense as laid down by this Court in the case of Murlidhar Bhagwandas (supra). Whether the person is so connected will depend on the facts of each case. The illustrations given in the case of Murlidhar Bhagwandas (supra) do not limit the words 'any person', but are only illustrative. The only reason why the words 'any person' are read down to exclude total strangers, is to prevent infringement of Art. 14 of the Constitution.

17. The directions in the present case, therefore, given by the AAC by his order of 29th November, 1960, are directions properly given under s. 31 of the IT Act, 1922, and the notices, therefore, which are issued on 26th October, 1961, by the ITO pursuant to the directions so given, cannot be considered as notices on total strangers barred by limitation. The High Court was, therefore, right in dismissing the writ petition.

18. The appeals are accordingly dismissed with costs.