The judgment of the court was delivered by
SHAH J.-- Ramanathan Chettiar, his son, Muthiah
Chettiar--called hereinafter for the sake of brevity, Muthiah--and Ramanathan,
Annamalai and Alagappan, sons of Muthiah, constituted a Hindu undivided family.
The family owned a 3/5th share in M. RM. S. Firm, Seramban, in Malaya. The firm
was assessed under the Indian Income-tax Act, 1922, in the status of a firm
resident within the taxable territories. On September 16, 1950, Muthiah
separated from the family taking his 1/5th share in the M. RM. S. Firm. On April
13, 1951, the status of the family became completely disrupted and the three
sons of Muthiah took in equal shares the remaining 2/5th share--the grandfather,
Ramanathan, taking no share in the M. RM.S. Firm.
For the assessment year 1952-53 Muthiah submitted a return
of his income as an individual and stated under the head "business
income". " Kindly ascertain his (assessee's) share of profit and
remittances from the Income-tax Officer, Second Additional Circle-I, Karaikudi,
in F. 6098-m/1952-53 ". In Part III of the return Muthiah supplied the
following information about his partners :
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Name and address Name of each partner Share
of the firm including assessee
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Messrs. R. RM. S. Firm 1. Assessee (Muthiah Chettiar)
60/303
Seramban, F. M. S. 2. VD. M. RM. M. RM. M. 40/303
Ramanathan Chettiar (minor)
3. VD. M. RM. M. RM. M. 40/303
Alagappan Chettiar (minor)
4. VD. M. RM. M. RM. M. 40/303
Annamalai Chettiar (minor)
5. C.P.R. 60/303
6. M.S.S. 60/303
7. Charity 3/303
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For the assessment year 1953-54 in column 3 in section B
of the return Muthiah stated : " Kindly ascertain the remittances from the
Income-tax Officer, Fifth Additional, Karaikudi, in F. 6098-m ", and at
page 3 of the return in column 3 of section F it was stated :
" Assessee has 60/303 share in Messrs. M. RM. S.
joint Seramban (Malaya). Kindly ascertain share of profit or logs from the
Income-tax Officer, Fifth Additional, Karaikudi, in F. 6098. "
In Part III of the return he set out the names of the
partners as were mentioned in the return for 1952-53. Against the names of
Ramanathan Chettiar, Alagappan Chettiar and Annamalai Chettiar it was not
disclosed that they were minors.
For the assessment year 1954-55 at the foot of page 1 of
the return Muthiah stated : " The assessee has a remittance of Rs.
6,188-12-0 from R. RM. S. Firm, Seramban. His share of income may be taken from
the firm's file.", and in Part III the names of seven partners as mentioned
in 1952-53 return were set out-Ramanathan, Alagappan, and Annamalai were not
shown as minors.
Ramanathan, Alagappan and Annamalai--the three minor sons
of Muthiah-represented by their mother and guardian also filed returns of their
respective income for the years 1952-53, 1953-54 and 1954-55 and disclosed
therein their shares in the profit from the 2/5th share in the M. RM. S. Firm.
For the assessment years 1952-53, 1953-54 and 1954-55 the
Income-tax Officer completed the assessments separately on the firm, on Muthiah
as an individual and on the three minors represented by their mother and
guardian. Muthiah was assessed in respect of his share in the income of the firm
and from other sources. In his returns Muthiah had not disclosed the shares
received by his minor sons and the Income-tax Officer did not in making the
assessments include shares of the minors from the firm under section
16(3)(a)(ii) of the Indian Income-tax Act, 1922. The Income-tax Officer issued
notices of reassessment to Muthiah under section 34(1)(a) of the Income-tax Act,
1922, for the years 1952-53 and 1953-54 and under section 34(1)(b) for the year
1954-55. Muthiah filed returns under protest declaring the same income as
originally assessed. In the view of the Income-tax Officer Muthiah had not
furnished in Part III, clause (c), of the return full facts regarding the other
parties and in column 2 he had merely disclosed that Ramanathan, Alagappan and
Annamalai were minors : that "information was not full in the sense that he
had not stated that they were minor sons" of Muthiah. Accordingly the
Income-tax Officer held that the income of the sons of Muthiah which should have
been included under section 16(3)(a)(ii) of the Income-tax Act had escaped
assessment in Muthiah's hands and he brought that income to tax.
The Appellate Assistant Commissioner confirmed the order
made by the Income-tax Officer. In appeal to the Tribunal it was contended by
Muthiah that he had fully and truly disclosed all the particulars he was
required to disclose in the returns of his income for the three years in
question, and "section 34(1)(a) had no application to the assessment years
1952-53 and 1953-54 and for 1954-55 the re-opening was based only on a change of
opinion." Muthiah also contended that section 40 of the Income-tax Act was
mandatory and since the Income-tax Officer had made separate assessments on the
minors represented by their mother, no further assessment under section 16(3)
could be made, the two sections being mutually exclusive.
The Tribunal observed that for the first two years section
34(1)(a) applied, that in respect of the year 1954-55 there was no change of
opinion but the assessment was made on information received within the meaning
of section 34(1)(b) of the Income-tax Act and that separate assessments of the
minors did not stop the Income-tax Officer from assessing the income received by
the minor sons in the hands of Muthiah. The Appellate Tribunal accordingly
confirmed the order of the Appellate Assistant Commissioner.
At the instance of Muthiah the following questions were
referred to the High Court of Madras :
" (i) Whether, on the facts and in the circumstances
of the case, the reassessment made on the assessee under section 34 of the Act
is valid in law for 1952-53 to 1954-55 ?
(ii) Whether, on the facts and in the circumstances of the
case, the inclusion of the share income of the minor in the hands of the
assessee by invoking the provisions of section 16(3) of the Act is valid in law
notwithstanding that an assessment is made on the minor represented by his
guardian ? "
The answer to the second question must, in view of the
recent judgment of this court in C. R. Nagappa v. Commissioner of Income-tax, be
in the affirmative.
In considering the first question it is necessary to refer
to certain provisions of the Income-tax Act, 1922. By section 3 the total income
of the previous year of every individual, Hindu undivided family, company and
local authority, and of every firm and other association of persons or the
partners of the firm or the members of the association individually was charged
to tax for that year in accordance with, and subject to the provisions of, the
Act at any rate or rates prescribed by the Finance Act. "Total income"
was defined in section 2(15) as meaning "total amount of income, profits
and gains referred to in sub-section (1) of section 4 computed in the manner
laid down in this Act." Section 4(1) set out the method of computation of
total income ; it enacted :
" (1) Subject to the provisions of this Act, the
total income of any previous year of any person includes all income, profits and
gains from whatever source derived which--
(a) are received or are deemed to be received in the
taxable territories in such year by or on behalf of such person, or
(b) if such person is resident in the taxable territories
during such year,
(i) accrue or arise or are deemed to accrue or arise to
him in the taxable territories during such year, or. . . "
Section 22 by sub-section (1) required the Income-tax
Officer to give notice by publication in the press in the prescribed manner,
requiring every person whose total income during the previous year exceeds the
maximum exempt from tax, to furnish a return in the prescribed form setting
forth his total income. Sub-section (2) authorised the Income-tax Officer to
serve a notice upon a person whose income in the opinion of the Income-tax
Officer exceeded the minimum free from tax. Section 23 dealt with the
assessment. It conferred power upon the Income-tax Officer to assess the total
income of the assessee and to determine the sum payable by him on the basis of
such return submitted by him. Rule 19 framed under section 59 of the Income-tax
Act, 1922, required the assessee to make a return in the form prescribed
thereunder, and in Form A applicable to an individual or a Hindu undivided
family or an association of persons there was no clause which required
disclosure of income of any person other than the income of the assessee, which
was liable to be included in his total income. The Act and the Rules accordingly
imposed no obligation upon the assessee to disclose to the Income-tax Officer in
his return information relating to income of any other person by law taxable in
his hands.
But section 16, sub-section (3), provided that in
computing the total income of any individual for the purpose of assessment there
shall be included the classes of income mentioned in clauses (a) and (b).
Sub-section (3)(a)(ii), in so far as it is material, provided :
" In computing the total income of any individual for
the purpose of assessment, there shall be included--
(a) so much of the income of a wife or minor child of such
individual as arises directly or indirectly--...
(ii) from the admission of the minor to the benefits of
partnership in a firm of which such individual is a partner. "
The assessee was bound to disclose under section 22(5) the
names and addresses of his partners, if any, engaged in business, profession or
vocation together with the location and style of the principal place and
branches thereof and the extent of the shares of all such partners in the
profits of the business, profession or vocation and any branches thereof, but
the assessee was not required in making a return to disclose that any income was
received by his wife or minor child admitted to the benefits of partnership of a
firm of which he was a partner.
Counsel for the Commissioner contended that in the forms
of returns prescribed in the " Notes of Guidance " for drawing up the
return were printed, and thereby the assessee was informed that he had to
disclose the income received by his wife and minor children from a firm of which
the assessee was a partner. Counsel has, however, not placed before the court
the forms of return in, vogue in the relevant year of assessment. In the
Income-tax Manual published under the authority of the Central Government in
1945 under clause (3) printed at page 185 the assessee is advised to include in
the return under the appropriate head certain classes of income which are liable
to be included in the assessment of an individual under section 16, and income
liable to be taxed under sections 41D, 44E and 44F. This instruction was
repeated in the Manual, Parts II and III at pages 344 and 345 in the 10th
edition published in 1950. But in the 11th edition of the Manual published in
1954 no such instructions were printed. About the date on which the instructions
were deleted counsel for the Commissioner was unable to give any information.
Assuming that there were instructions printed in the Forms of return in the
relevant years, in the absence of any head under which the income of the wife or
minor child of a partner whose wife or a minor child was a partner in the same
firm, could be shown, by not showing that income the taxpayer cannot be deemed
to have failed or omitted to disclose fully and truly all material facts
necessary for his assess ment. Section 16(3) imposes an obligation upon the
Income-tax Officer to compute the total income of any individual for the purpose
of assessment by including the items of income set out in clauses (a)(i) to (iv)
and (b), but thereby no obligation is imposed upon the taxpayer to disclose the
income liable to be included in his assessment under section 16(3). For failing
or omitting to disclose that income proceedings for reassessment cannot
therefore be commenced under section 34(1)(a). Section 22(5) required the
assessee to furnish particulars of the names and shares of his partners, but
imposed no obligation to mention or set out the income of the nature mentioned
in section 16(3). In the relevant years there was no head in the Form under
which income liable to be assessed to tax under section 16(3)(a) and (b) could
be disclosed.
We are, in the circumstances, unable to agree with the
High Court that section 34 imposed an obligation upon the assessee to disclose
all income includible in his assessment by reason of section 16(3)(a)(ii).
Section 34(1)(a) sets out the conditions in which the power may be exercised: it
did not give rise to an obligation to disclose information which enabled the
Income-tax Officer to exercise the power under section 16(3)(a)(ii), nor had the
use of the expression " necessary for his assessment " in section
34(1)(a) that effect.
The High Court did not consider the question whether in
the year 1954-55 the notice under section 34(1)(b) was properly issued against
Muthiah. The Tribunal in their judgment observed :
" There is no basis for the argument that the
Income-tax Officer had only changed his opinion and re-opened the assessment.
"
We agree with that view. The order of reassessment was
made well within four years from the date of the last day of the year of
assessment 1954-55. The notice was therefore competently issued by the
Income-tax Officer.
The order passed by the High Court, in so far as it
relates to the years 1952-53 and 1953-54 is set aside and the answer in the
negative is recorded. For the year 1954-55 the answer recorded by the High Court
is confirmed. There will be no order as to costs throughout
