The judgment of the court was delivered by
MUDHOLKAR J.----This is an appeal by special leave against
the judgment of the Bombay High Court in a writ petition challenging the notice
issued under section 34(1) of the Indian Income-tax Act, 1922, by the First
Income-tax Officer, Bombay, who is the appellant before us. In the writ petition
various grounds were urged by the respondent in support of the contention that
the notice was bad in law. The High Court, however, dealt with only one of those
contentions, accepted it and did not permit the respondents' counsel, Mr. Mehta,
to put forward the other contentions urged in the writ petition by the
respondents.
The appellant had issued notice to the respondents under
section 34(1)(a) of the Income-tax Act in respect of an escaped income of Rs.
47,595 for the assessment year 1944-45. This notice was issued by him on March
27, 1957. On behalf of the respondents, it is contended that the notice was bad
because, though it was in respect of an amount of less than Rs. 1 lakh it was
issued after the expiry of the assessment year and that the sanction of the
Central Board of Revenue for issuing that notice had not been obtained by the
Income-tax Officer as required by clause (iii) of the proviso to section 34(1)
of the Act. It is not disputed before us that the case falls under section
34(1)(a). That provision reads thus :
" 34. (1) If----
(a) the Income-tax Officer 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 section 22 for any year or to disclose fully and truly all
material facts necessary for his assessment for that year, income, profits or
gains chargeable to income-tax have escaped assessment for that year, or have
been under-assessed, or assessed at too low a rate, or have been made the
subject of excessive relief under the Act, or excessive loss or depreciation
allowance has been computed, or .........
he may in cases falling under clause (a) at any time ....
serve on the assessee . . . . a 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 or recompute the
loss or depreciation allowance ; 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. "
We have quoted only the relevant portion. Then follows the
first proviso which runs thus :
" Provided that the Income-tax Officer shall not
issue a notice under clause (a) of sub-section (1),----
(i) for any year prior to the year ending on the 31st day
of March, 1941 ;
(ii) for any year, if eight years have elapsed after the
expiry of that year, unless the income, profits or gains chargeable to
income-tax which have escaped assessment or have been under-assessed or assessed
at too low a rate or have been made the subject of excessive relief under this
Act, or the loss or depreciation allowance which has been computed in excess,
amount to, or are likely to amount to, one lakh of rupees or more in the
aggregate, either for that year, or for that year and any other year or years
after which or after each of which eight years have elapsed, not being a year or
years ending before the 1st day of March, 1941 ;
(iii) for any year, unless he has recorded his reasons for
doing so, and, in any case falling under clause (ii), unless the Central Board
of Revenue, and in any other case, the Commissioner, is satisfied on such
reasons recorded that it is a fit case for the issue of such notice .......
It will thus be seen that where the Income-tax Officer has
reason to believe that due to any act of the assessee a full and accurate
declaration was not made by the assessee for any year, with the result that part
of his income has escaped for that year, the Income-tax Officer may issue a
notice under clause (a) at any time.
The respondents' contention before the High Court was that
the notice was bad because it had not complied with the two conditions laid down
in the proviso to section 34(1). Adverting to this contention the High Court has
observed thus :
" Before the amendment of this section which was in
force on the 27th March, 1957, the period of limitation of eight years was
provided with regard to the issue of notices under section 34(1)(a) and a period
of four years for cases falling under section 34(1)(b). By the amendment the
period of limitation was removed and the Legislature provided that if the case
fell under section 34(1)(a) a notice can be served at any time. But while
removing any bar of limitation, the Legislature provided some safeguards for the
assessee and these safeguards were three in number and they were set out in the
proviso. The first safeguard was that a notice shall not be issued for any year
prior to the year ending on the 31st day of March, 1941 ; the second safeguard
was that, if eight years had elapsed then the notice should not be issued for an
escaped income which aggregated to less than one lakh of rupees ; and the third
safeguard was that the Central Board of Revenue had to be satisfied on reasons
to be recorded that this was a fit case for the issue of a notice, which was for
a period beyond eight years. Now, admittedly, this notice is for an amount which
is less than a lakh of rupees and admittedly the Central Board of Revenue has
not considered this matter at all. Therefore, there does not seem to be any
answer to the contention put forward by the petitioner. "
The High Court is right in saying that a notice cannot be
issued where the income which has escaped assessment is less than a lakh of
rupees and where more than eight years have elapsed from the assessment year. To
this, however, there is one exception and that is where the matter would fall to
be governed by the second proviso to section 34(3). To this aspect we will,
however, come a little later. But before that what we must consider is the view
of the High Court that the sanction of the Central Board of Revenue was also
necessary. Under clause (iii) of the proviso to section 34(1) a notice can issue
only if the Central Board of Revenue is satisfied with the reasons recorded by
the Income-tax Officer for issuing a notice. For convenience we are describing
this process as sanction of the Central Board of Revenue. The sanction under
this clause is, however, necessary only where the notice in question is issued
under clause (ii) of the proviso. That is evidently what the Legislature meant
when it says " in any case falling under clause (ii) ". For, clause
(ii) has to be read with the opening words of the proviso : " Provided that
the Income-tax Officer shall not issue a notice under clause (a) of sub-section
(1) ". So read it will be clear that the words " in any case "
used in clause (iii) only mean a case in which notice can be issued under clause
(ii). Such a notice can be issued only when the escaped income is of one lakh of
rupees and over. It was, however, contended by Mr. Shroff that clause (ii) of
the proviso dealt not only with the escaped assessment of one lakh of rupees and
over but also with assessments which were less than one lakh of rupees and that,
therefore, even in the present case the sanction of the Central Board of Revenue
was required. By excluding action with respect to escaped assessment of less
than one lakh of rupees, clause (ii) can, in one sense, be regarded as dealing
with escaped assessments of this kind. But it would be wrong to say that because
of this, clause (iii) requires the obtaining of the sanction of the Central
Board of Revenue for a notice to be issued with respect to it. As already
pointed out, clause (iii) requires such sanction where the notice is issued
under clause (ii) and when on a construction of clause (ii), no notice can be
issued with respect to a class of escaped assessments, there can possibly be no
requirement of the sanction of the Central Board of Revenue. If a notice is
issued by virtue of some other provision such as the second proviso to
sub-section (3) of section 34, it would be a notice " in any other case
" referred to in clause (iii) of the proviso to sub-section (1) of section
34 and in such a case the sanction which is required is only that of the
Commissioner. Such a sanction was obtained in this case and, therefore, the
notice cannot be said to be bad because the sanction of the Central Board of
Revenue has not been obtained. Now, we will come to the other aspect of the
matter.
Limitation is no doubt placed upon the power of the
Income-tax Officer by clause (ii) of the first proviso which says that if eight
years have elapsed after the expiry of that year no such notice can issue unless
the income which has escaped assessment is likely to amount to one lakh of
rupees or more. Here admittedly the income which has escaped assessment is below
one lakh of rupees and more than eight years have elapsed since the assessment
year in respect of which the income is alleged to have escaped assessment.
Clearly, therefore, no notice could issue under clause (ii). The answer given by
the Income-tax Officer, however, is that limitation is taken away by the second
proviso to sub-section (3) of section 34. We would quote section 34(3) and the
second proviso to it. They run thus :
" No order of assessment or reassessment, other than
an order of assessment under section 23 to which clause (c) of sub-section (1)
of section 28 applies or an order of assessment or reassessment in cases falling
within clause (a) of sub-section (1) or sub-section (1A) of this section shall
be made after the expiry of four years from the end of the year in which the
income, profits or gains were first assessable : ...
Provided further that nothing contained in this section
limiting the time within which any action may be taken or any order, assessment
or reassessment may be made, shall apply to a reassessment made under section 27
or to an assessment or reassessment made on the assessee or any person in
consequence of or to give effect to any finding or direction contained in an
order under section 31, section 33, section 33A, section 33B, section 66 or
section 66A. "
The second proviso to section 34(3) could be pressed in
aid by the Income-tax Officer because in issuing the notice he was giving effect
to a direction contained in the order of a higher income-tax authority.
Dealing with this matter the High Court has observed as
follows in its judgment :
" Now, when there was a limitation of eight years
under section 34(1)(a) the second proviso to section 34(3) had to be resorted to
by the income-tax department if it wanted to issue a notice after the period of
limitation, and a notice after eight years in a case falling under section
34(1)(a) could only be issued provided it was a result of a direction contained
in an order passed by an income-tax authority. But by reason of the recent
amendment the question of limitation does not arise, but the legislature has
provided certain safeguards as already pointed out. Therefore, whether a notice
is issued as a result of a direction contained in any order of an income-tax
authority or not, if it is a notice which is issued beyond eight years the
notice must satisfy the conditions laid down in the proviso to section 34(1).
Therefore, the result is that in some respects the law has been made more
rigorous against the assessee ; and in other respects it has been made more
lenient. Before the amendment a notice could be issued after eight years in
respect of any escaped income, whatever the amount, provided the notice was
issued to give effect to a direction contained in an order of an income-tax
authority. Now a direction is not necessary for the issue of a notice. But as
against that an assessee whose escaped income is not a lakh of rupees is
completely protected and even though there may be a direction contained in an
order of an income-tax authority no notice can be issued against the assessee if
the escaped income is less than a lakh of rupees. Therefore, on the one hand,
the assessee whose escaped income is less than a lakh of rupees is now put in a
better position than he was before the amendment. The assessee whose escaped
income is more than a lakh of rupees is put in a worse position because he can
be proceeded against even without a direction contained in an order of an
income-tax authority provided the Central Board of Revenue has applied its mind
to the question of the issue of the notice. "
It would appear that the view of the High Court was that
the provisions of the second proviso to section 34(3) would not apply to a case
where the escaped assessment is of an amount less than a lakh of rupees and more
than eight years have elapsed. Apparently, the High Court has overlooked the
fact that the second proviso to sub-section (3) of section 34 was amended first
by Act 25 of 1953 and then by Act 18 of 1956. As it stood prior to these
amendments it read thus :
" Provided further that nothing contained in this
sub-section shall apply to a reassessment made under section 27 or in pursuance
of an order under section 31, section 33, section 33A, section 33B, section 66
or section 66A. "
By the amendment of 1953, for the word " sub-section
", the words " section limiting the time within which any action may
be taken or any order, assessment or reassessment may be made " were
substituted. By the amendment of 1956 it now stands as already quoted by us. If
the proviso in its present form applies here it would govern the whole of
section 34(1) and would consequently include even an escaped assessment with
respect to which limitation is provided in clause (ii) of the first proviso to
section 34(1). The result, in our opinion, would be the same even if the case
were to fall to be governed by the Amending Act of 1953, though not by that of
the Amending Act of 1956. We may add that the amendment of 1953 took effect from
April 1, 1953, and that of 1956 from April 1, 1956.
Apart from the view expressed by the learned judges as
regards the effect of the changes made in section 34(1) with the provisos we
have set out earlier----a view which we have held is not correct----they did not
further consider the proper construction to be placed on the second proviso to
section 34(3) of the Act on which the validity of the impugned notice to the
respondents must ultimately be decided.
As we have pointed out earlier, at the beginning of the
judgment, the learned judges confined their attention practically only to the
construction of proviso (iii) to section 34(1) which was decided in favour of
the respondents and did not permit them to argue the other points raised by
them. We do not propose to decide these other points, particularly for the
reason that the parties are not agreed as to what precisely were the contentions
which were raised for argument.
For the reasons stated above, the decision of the High
Court is clearly wrong. We, therefore, allow the appeal, set aside the order of
the High Court and remit the matter to it for the consideration of the other
points which were raised before it by the respondents but upon which they were
not heard. As regards costs we think that they should abide the result of the
writ petition before the High Court.
Appeal allowed. Case remanded
