P L D 1965 Supreme Court 443 (PLP)

CORNELIUS, C. J.‑This is an appeal under section 66‑A of the Income‑tax Act, 1922. It arises out of an order made under section 34 of that Act by an Income‑tax Officer in respect of the assessment of the Sutlej Cotton Mills Ltd., Okara for the assessment year 1949‑1950. The assessment for that year had been completed much earlier. On the 22nd February 1954, the Income‑tax Officer issued a notice under section 34(1) of the Act saying that he proposed to re‑assess the Company's income for the year in question because he had "reason to believe the income, profits or gains chargeable to income‑tax for the year ending 31st March 1950, have (a) escaped assessment, (b) been under assessed." The notice said that it Nias being issued with the previous approval of the Inspecting Assistant Commissioner. The statutory time, namely, 35 days was allowed for making a fresh return. On the 17th March 1954 a reply was sent by the assessee‑Company in consequence of a further notice issued under section 22 (4) which notice was described as vague since it did not specify what particular books of account were required and requested that these should now be specified. The reply also said: "The legal position is well‑settled in regard to section 34 proceedings. It is the Department that has to show what income has escaped assessment, and there is no onus on the assess6e to establish that no income has so escaped." In the second notice the requisite books were duly specified and directed to be produced on the 22nd March 1954. On the 29th March a telegraphic notice was sent under section 23(2), calling on the assessee to appear on the 30th March. On the same day, a notice under section 23 was issued specifying 15 "important points (which) call for explanation and elucidation." Of these, special mention may be made of the points concerning (1) closing stock shown as on the 31st March 1948, (2) the trading account of cotton and cotton seeds, and (3) the account for cotton sold to non‑Pakistanis through the Head Office of the assessee in Calcutta. Examination of the books was made in the presence of the assessee's representative on the 30th and 31st March 1954. The order of the Income‑tax Officer is dated the 31st March 1954, and it is clear that it could only have been made under great pressure for it goes into very considerable detail in arriving at a figure of about Rs. 54 lacs of under assessment, placed under eight different heads. The following passage in the order clearly shows the conditions under which the work was done "The statement of the Secretary has been recorded today from which it is abundantly clear that for reasons best known to him, he would not place any card on the table and explain any of the items for which queries were projected to him. My impression is that he was racing with time. This has been my own disadvantage because on account of shortness of time, I could not fully examine the accounts and investigate as I would like to get and ascertain the requisite information, I had to close the hearing of this case (sic)." The reason for the baste appears from the provision in section 34 of the Act fixing limitation for the issue of a notice and the making of an assessment thereunder. As the section stood in the year 1954, there were two periods of limitation fixed, and it is a principal question for consideration in this appeal whether the Income tax Authorities as well as the High Court have dealt with the case on the basis of the period‑correctly applicable in relation to the facts and circumstances of the case. All these authorities as well as the High Court have dealt with tie case as if the last date for making re‑assessment under section 34 was the 31st March 1954, that is four years from the last date of the assessment year. The case going up to the Appellate Assistant Commissioner, on appeal by the assessee, the following findings were given, viz. :‑ (1) there was sufficient material before the Income‑tax Officer to justify action under section 34; (2) the allegation that the re‑assessment order was not made on the 31st March 1954, but on a later date was baseless; but (3) notices under subsections (2) and (3) of section 23 were issued simultaneously, and therefore the proceedings were illegal; and (4) the assessee was only given a day's time to comply with these notices which was "too short" and "not reasonable". On these grounds, the order of re‑assessment was set aside, and the Income‑tax Officer was directed to proceed according to law "to make fresh assessment after allowing the appellant a reasonable opportunity under sections 23(2) and 23(3)." A further appeal was taken before the Income‑tax Appellate Tribunal, again by the assessee. The Income‑tax Appellate Tribunal came to the following conclusions: (1) the Appellate Assistant Commissioner's finding was correct that the issue of simultaneous notices under section 23(2) and section 23(3) of the Act was illegal; (2) that the time allowed to the assessee to furnish its explanation was so short that it was "physically impossible" to make compliance with the Income‑tax Officer's notice within that time; (3) for this reason, the notice should be regarded as not being in accordance with law, or "in other words, it was no notice at all" so that assessment was completed without issuing a proper notice under section 23(2); (4) the Appellate Assistant Commissioner by setting aside the Income‑tax Officer's order, and directing re‑assessment, enabled the later officer to act in a manner not open to him at the time when he acted, since in the meantime limitation had expired and the Appellate Assistant Commissioner could not "possibly extend the period of limitation which was not available to the Income‑tax Officer himself." In consequence of these findings, the Income‑tax Appellate Tribunal accepted the appeal and setting aside the order of the Appellate Assistant Commissioner directed that the "assessment under section 34 must be annulled." On the view that limitation expired on the 31st March 1954, no further action could be taken under section 34, if this order stood. Thereupon, the Income‑tax Commissioner applied to the Tribunal under section 66 of the Act, and obtained a reference to the High Court of the following question:‑‑‑ "Whether in the facts and the circumstances of the case, the Tribunal was right in holding that the assessment was liable to be annulled and not merely set aside?" In a lengthy order, the High Court came to the conclusion that the answer to the reference was in the negative, viz., that the Tribunal was wrong in making an order of annullment. The principal grounds on which this conclusion is based are firstly, that the time allowed to the assessee by the Income‑tax Officer to make his explanation was sufficient, and secondly, that the view of the Income‑tax Authorities that it was too short was not by itself sufficient for reaching the conclusion that the Income -tax Officer had acted without jurisdiction in issuing his notice and taking consequential action under section

34. The point that the issue of simultaneous notices under sections 23(2) and 23(3) vitiated the consequential action was not raised before the High Court. It was not mentioned in the arguments before us, presumably because if the view of the High Court were sustained, there would be opportunity for issuing fresh notices. The present appeal is brought before us by the assessee and we have heard Mr. A. K. Brohi, a Senior Advocate of this Court as well as Mr. N. A. Palkhiwala, an Advocate of the Supreme Court of India in support of the appeal. Learned counsel for the assessee found little difficulty in presenting a challenge to the first finding of the High Court. The first occasion on which the ,q assessee was presented with a statement as to the specific items in the accounts of the Mill which were questioned was on the 29th March 1954. Fifteen such items were mentioned and several of them required production of evidence. For instance by the third item of demand, the assessee was required "to furnish all factor enabling to formulate trading account and support the purchases and sales by proper vouchers and contract or other agreements, if any." The Mill was obviously operating on a large scale and that production of vouchers, contracts and agreements to support each purchase and sale was obviously impossible within a matter of two days. The other requirement namely, to produce evidence to enable the drawing up of a trading account is equally of a large nature, and evidence in support would need to be drawn from many sources. Under the fifth item, again, production of original vouchers was demanded. As the Mill is situated at Okara in the Montgomery district, apart from the time needed to search for the specific documents there was also the time taken up in travelling to consider. Under item No. 6, demand was made for the basis upon which stocks, of yarn and cloth had been evaluated. Under item No. 8, a demand was made to explain an excess of about 3,62,000 yards of cloth, which could only be made by production of documentary evidence. Items Nos. 11 and 12 share the same quality and under item No. 15, details were asked for in support of an expenditure of about Rs. 1,84,000 on overhauling of machinery. With due respect to the view of the learned Judges of the High Court, basing on such experience as we have of judicial enquiries, we are inclined rather to agree with the view that production of the necessary evidence from the books in respect of these demands was a physical impossibility in the available time. Learned counsel for the assessee laid great stress on the point which had prevailed with the Tribunal, namely, that by giving notice which was totally inadequate, in relation to the kind of enquiry which was to be held, there had been violation of a rule of natural justice such as rendered the whole proceeding void; the conclusion to which it was brought on the 31st March 1954 is thereby entirely vitiated, and the position could not be remedied by the order of the Appellate Assistant Commissioner setting aside the assessment and directing a fresh assessment because that would have the effect of enabling the Income‑tax Officer to do that which by reason of the limitation of time he could not do, when he was seized of the case. In the course of the hearing, however, a question was raised, whether, at the relevant time, the period of limitation was not, in fact, eight years, since the Income‑tax Officer had found concealment of particulars and deliberate furnishing of inaccurate particulars. Under section 34, where the Income‑tax Officer was of the opinion that there had been such concealment or furnishing of inaccurate particulars a notice could be issued at any time within eight years, and moreover the re‑assessment could be made at any time within the same period. This point was not raised in the concise statement, although there was in the judgment of the High Court mention of this aspect in the following sentence:‑ "The date is material as in the opinion of the Income‑tax Officer the assessment under section 34 had to be completed by the 31st March 1954, although it was a case of concealment of particulars of the assessee's income and deliberate furnishing of incorrect particulars in which case the period prescribed for completion of assessment is eight years.". To this the reply given by Mr. Brohi was that the Income‑tax Officer as well as the Appellate Assistant Commissioner proceeded on the assumption that the four‑year period applied. It was not the Commissioner of Income‑tax who took the matter before the Tribunal, but the assessee, and as even in the High Court, the point of extended limitation was not raised, it should not be allowed to be raised now. In the submission of NIr. Brohi, to admit such an argument would have the effect of altering the whole nature of the question referred, and this was not permissible under section 66 and section 66‑A of the Income‑tax Act. The question of violation of natural justice, as has been seen, was raised in bar of the jurisdiction of the Income‑tax Officer to make the order of re‑assessment which he made, and a point of jurisdiction is one which is not barred even at the ultimate ;rage before this Court. The Income‑tax Appellate Tribunal had expressly held that because it was not possible for the Income‑tax Officer to comply with all the requirements of section 34(1), "therefore the assessment made in disregard of these provisions should be held to be a nullity." The Tribunal said expressly that the notice issued under section 34 was "not in accordance with law or in other words, it was no notice at all." It is clear f nom these expressions that in the view of the Tribunal, the action of the Income‑tax Officer in issuing the notice of the 22nd February, 1954, was in the circumstances an act performed without jurisdiction. The special stress in the case was on the shortness of time available, assuming without question that limitation was to expire on the 31st March 1954. If, on the other hand, limitation was, on the basis of the actual facts, to expire on the 3 l st March 1958, then indeed there was plenty of time in which the proceedings could have been continued and brought to a satisfactory conclusion without either leaving the assessee "racing with time" (the Income tax Officer probably meant "playing for time") or the Income‑tax Officer being handicapped by lacking the facility to make a really full examination of all the documentary evidence. I t is open to a Court before which a point of jurisdiction is raised, to deal with it at the very last stage, even if the point was not raised at any earlier stage, provided that all the evidence necessary for the determination of the point is available on the record so that no further evidence is required for reaching a satisfactory conclusion. To gain a clear understanding of the conditions applying to the exercise of the power of an Income‑tax Officer under section 34, as it stood in 1954, it is necessary to examine with some care the relevant provisions in that section as they stood at the relevant time. These may be extracted from the full section as below:‑ "(1) If for any reason income, profits or gains chargeable to income‑tax' have escaped assessment in any year . . . . . the Income‑tax Officer may, in any case in which he has reason to believe that the assessee . . . has . . . . concealed the particulars of his income or deliberately furnished inaccurate particulars thereof at any time within eight years and in any other case at any time within four years of the end of that year, serve an the person liable to pay tail . . . . . a notice containing all or any of rite requirements which may be included in a notice under subsection (2) of section 22, and may proceed to assess or re‑assess such income . . . . . Provided . . . . .. Provided further . . . . .. Provided further . . . . ." "(2) No order of assessment . . . . , or re‑assessment under subsection (1) of this section shall be made after the expiry in any case in which the assessee has . . . . concealed the particulars of his income or deliberately furnished incorrect particulars of such income . . . . of eight years and in any other case of four years from the end of the year in which the income, profits or gains were first assessable." These provisions may be re‑stated somewhat as follows. After income has been assessed to income‑tax, if any part of the assessee's income is thought to have escaped assessment, the Income‑tax Officer may serve on the assessee a notice in conformity with section 22(2) and may proceed to assess or re‑assess such income. He may serve the notice at any time within eight years if he has reason to believe that the assessee has concealed particulars of his income or has deliberately furnished inaccurate particulars, in his original return. But if the Income‑tax Officer has no reason to believe that there has been any such concealment or deliberate furnishing of inaccurate particulars, then the notice shall not be served after the lapse of four years from the close of the assessment year in relation to such income. The limitation of time applies not only to the issue of the notice, but also to the making of the order of assessment or re‑assessment, consequent upon the issue of the notice. The assessment in either case may extend to the whole of the income which initially escapedi assessment altogether or was under‑assessed. The section cannot be read so as to confine assessment under section 34, after the lapse of four years from the expiry of the original assessment year, to those items only in respect of which concealment or deliberate misrepresentation is found. Such a finding operates to extend time, against the assessee, in respect of all income which is found to have escaped assessment or been under‑assessed, whether through such concealment or misrepresentation or otherwise. The question arises whether it is a requirement of section 34 that the notice issued under section 34(l) should itself state that the Income‑tax Officer "has reason to believe that the assessee has concealed particulars or deliberately furnished inaccurate particulars," in order to gain the advantage of the extended limitation. There is room for the view that if, for the first time in such a case, the Income‑tax Officer issues his notice under section 34(1) after the lapse of four years from the last date of the assessment year, then indeed he would be acting without jurisdiction, unless it was shown that he had reason to believe that the necessary conditions for the exercise of his jurisdiction, after, the lapse of four years did in fact exist. That imports a certain onus, in limine, falling to be discharged by the Department. Although this does not appear expressly in section 34(1), which lays down only that the notice shall conform to the requirements of section 22(2) viz., a notice requiring the assessee to .furnish a duly verified return, setting forth particulars of his income for the purposes of application of the tax, yet in view of the differential periods of limitation, and the condition attaching to the application of the extended period, applying the ordinary rules of construction, the conclusion which has been stated above would not be easy to resist. But the case is otherwise where the notice is issued within the four‑year period. In such a case, it is sufficient if the notice contains no more than a statement that income has escaped assessment or has been under assessed, etc., and calls upon the assessee to furnish a return of his income for the relevant period.1 That was what the Income‑tax Officer did by his notice of the 22nd February 1954. It is clear from the documentary evidence led in the case that it was only on the 29th March 1954 that the Income tax Officer was in a position to provide the assessee with details of the particular items where, in his opinion, a lesser iiico111e had been shown than had actually accrued, and for this he demanded explanations. After the explanations had been received, the Income‑tax Officer formulated his conclusions. From his assessment order it is evident that in a number of instances he came to conclusion, which are equivalent to findings that there had been concealment of particulars of income and deliberate furnishing of incorrect particulars. Thus, with reference to an excess of about 3,60,000 yards of cloth, which was said to have resulted from "the process of calendering the cloth manufactured," he reached the following conclusion:‑ "It could not, therefore, be accepted that the excess found was due to calendering. I shall associate this excess to the undisclosed opening stock which for more than one reasons had been sold outside the accounts." (the underlining* is mine) In another place, discussing the feature that a stock of 18 lacs yards of cloth valued at two lacs of rupees was shown at the end of the year 1947‑48 when the figure in money for the previous year was some four times higher, and for the four succeeding years, the minimum yardage was 51 lacs and the maximum, 87 lacs, the Income‑tax Officer recorded the conclusion that "large stocks of finished cloth as well as yarn . . . . . had been sold outside the books." When he examined the trading account of cotton and cotton seeds, he found excesses which in his opinion gave rise "to the irresistible inference that the trading in these two commodities had been done outside the accounts as well and that such profits had been suppressed". There had been transactions of sale by the assessee to buyers outside Pakistan through the Head Office of the Mill in Calcutta and as to this, the profit shown on sales of about Rs. 1,60,00,000 was 1.75 per cent., which the Income‑tax Officer refused to accept as true and came to the conclusion that "there has been gross underselling to the parties" and he further observed in respect of this ,item:‑ "For obvious reasons, this is yet another histai:ce of attempt at deliberate concealment of the real profit." It is thus clear from the record itself that having commenced the proceeding with a simple notice requiring a return, and stating that income had escaped assessment/been under assessed, the Income‑tax Officer, within the four‑year period discovered a number of doubtful items, and also recorded conclusions in respect r thereof, indirectly in some instances and in others directly, that there had, been concealment of particulars as well as deliberate presentation of incorrect particulars. The question arises whether on these facts, the period of limitation available to the Income‑tax Officer was not in act eight years. It would be eight years provided that section 34 subsections (1) and (2) read together are to be construed as enabling extension of the period of limitation to eight years, although the original notice having been issued within four years, is in simple terms, i.e., it does not allege concealment of particulars, etc. It has been said already that where the Income‑tax Officer first purports to exercise jurisdiction under section 34 after the lapse of four years, his jurisdiction would seem to be subject to the requirement that he has reason to believe as above, and further requirements may well be that he should expressly say so in the notice, and be prepared to establish prima facie that there has been concealment, etc. But the other case does not appear to be excluded, namely, that of a simple notice conformable to section 22(2), issued within four years resulting in the discovery of concealment, etc. The section in its terms is capable of application in such a case. It cannot be construed to require mention of reason to believe that there has been concealment of particulars, etc., in the initial notice, when at that stage such reason had not appeared. The differential periods of limitations are applicable in H terms of the section not only to the issue of the notice, but also to the making of the consequential assessment, and would appear to cover the whole of the proceedings from the initiation to the completion thereof. Where. as a matter of fact, the Income‑to Officer has found reason to believe that there has been concealment of particulars, etc., section 34(2) gives him a period of eight years to make a re‑assessment, and not only four years. The conclusion therefore must be that the terminal date of the making of an order of assessment under section 34 is not determined by the form of the initial notice, where it is issued within the period of four years, but is determined by "reason" appearing to the Income‑tax Officer, "to believe" that in the relevant respect there has been concealment of particulars, etc. Here, it is clear that the "reason to believe" appeared to the Income‑tax Officer within the four year period, and there was, therefore, no need for him to issue a fresh notice, making mention of it. On this view, it would seem that on the 31st March 1954, the income‑tax Officer was not so much pressed for time as he thought. He had time until the 31st March 1958 to complete his proceedings, for he had formed and expressed the view that in respect of at least four items of the account, there had indeed been concealment 1 of particulars, etc. In this view of the matter, the argument of denial of natural justice falls to the ground and equally the argument that the actions of the Income‑tax Officer were devoid o jurisdiction is deprived of all foundation. The order of the on Appellate Assistant Commissioner directing re‑assessment, after giving full opportunity to the assessee to explain and to produce evidence, would have been perfectly correct in law, had he considered whether the extended period of limitation was available, and if he had come to the right conclusion, namely, that on a proper construction of section 34. the findings of the Income‑tax Officer were sufficient to operate such an extension, no fault could have been found with his order. The view of the Income‑tax Appellate Tribunal that the entire action under section 34 by the Income‑tax Officer was void for lack of jurisdiction through violation of a rule of natural justice, proves to be wholly unsustainable, and in the result, while it is not possible, speaking with due respect, to agree with either of the conclusions on which the answer given by the High Court to the question referred is based, the opinion of the learned Judges that the view of the Tribunal was wrong, must be upheld. In arriving at this conclusion, it has not been necessary in any way, to go outside the four corners of the question referred, or subject it to modification in any sense. The "facts and circumstances" have been accepted as they appear on the record, for the examination of the question. It was pointed out in the course of the argument that in they opinion returned by the High Court, there is extensive examination of the assessee's accounts in relation to question raised in the Income‑tax Officer's notice of the 29th March 1954, and views have been expressed thereon by the learned Judges which are relevant to the acceptance or rejection of these accounts. It is complained that such an examination of the facts upon which the Income‑tax Officer was required to adjudicate in the first instance, constituted an incursion into a jurisdiction which belonged exclusively within the Income‑tax Department. The question referred was one purely of law and, in case there is to be re‑assessment, it is of importance that all questions of facts arising should be left to be decided within their exclusive jurisdiction by the Income‑tax authorities, unaffected by any independent examination of those facts by the High Court. With respect to the learned Judges, this complaint appears to be well‑founded, and it becomes unnecessary for this Court to say, at the conclusion of this judgment, that on any question of fact arising in the re‑assessment which the Income‑1 tax Officer is required to make, in consequence of the answer returned by the High Court, any expression of opinion in the judgment ‑of the High Court should not be treated as binding on the Income‑tax Authorities. I would accordingly dismiss this appeal, but having regard to the difficult nature of the questions raised, and that the error in the order of the Tribunal is found by this Court on grounds other than those which furnished the basis for the High Court's opinion, the parties should, in my opinion, be left to bear their own costs. S. A. RAHMAN, J.‑I agree. FAZLE‑AKBAR, J.‑I agree. B. Z. KAIKAUS, J.‑I agree. HAMOODUR RAHMAN, J. ‑I agree. A. H. Appeal dismissed.