1965 PLP 757 (PTD)

The substantial question for consideration in the present case, therefore, is, whether the second proviso to section 34, (3) will save the assessments from the bar of limitation. Section 34 provides for a contingency where the income of an assessee had escaped assessment. There are two classes of cases dealt with by it: (i) where there had been an omission or failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for the assessment: vide section 34 (1) (a); and (ii) where the Income-tax Officer, in consequence of information in. his possession, has reason to believe that income, profits or gains chargeable to tax had escaped assessment. This is provided by section 34 (1) (b). This clause will apply to a case where the assessee had furnished a return but his income or part thereof had escaped assessment for one reason or another. Subsection (3) of section 34 provides that notices for initiating proceedings under the section (which is an essential preliminary for proceedings thereunder) have to be issued, in cases coming under clause (a) of section 34 (1) within, a period of eight years and with respect to cases coming under clause (b) thereof, within a period of four years from the end of the year in which the income was first assessable. The section has been amended from time to time: one of the amendments introduced is the second proviso to section 34 (3) which enacted, inter alia, an exception to subsection (3). That proviso runs: "Provided further that nothing contained in this section limiting the, time within which any action may be taken or any order, assessment or re-assessment may be made, shall apply to a re-assessment made under section 27 onto an assessment or re-assessment 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 33-A, section 33-B, section 66 or section 66-A." The effect of the proviso is to remove the time-limit for the initiation of proceedings under section 34 in respect of escaped income of an assessee and give effect to the direction contained in any appellate order. It is this provision that has been relied on by the Department as well as by the Appellate Tribunal for sustaining the proceedings taken under section 34 against the two assessees in the instant case. As we stated, this proviso has been impugned as discriminatory in its operation and, therefore, void as contravening Article 14 of the Constitution. The argument is that while under the proviso the assessment on assessees, in whose cases the appellate authority gave a finding that the income was assessable, for example, as the income for another year, could be re-opened for such year without any bar of limitation, the other assessees, whose appeals were disposed of without any such finding, could obtain the benefit of the bar of limitation, if their assessments were to be re-opened on the ground that the income had escaped assessment. In S. C. Prashar v. Vasantsen Dwarkadas ((1956) 29 I T R 857), the Bombay High Court took the view that no valid distinction could be drawn between persons with regard to whom a finding or direction was given by the appellate authority and persons with regard to whom no such direction or finding was given, and that, therefore, the second proviso would have to be struck down as ultra vires. This decision went up on appeal to the Supreme Court in Prashar v. Vasantsen Dwarkadas ((1963) 49 I T R 1 (S C)). The learned Judges, by a majority, held that, in so far as the second proviso to section 34 (3) authorised the assessment or re-assessment of any person, other than the assessee, beyond the period of limitation specified in section 34, in consequence of or to give effect to a finding or direction given in an appeal, etc., violated the provisions of Article 14 of the Constitution and was, therefore, invalid to that extent. It will be noticed that the view of the Bombay High Court was that the provision in the second proviso to section 34 (3) was void even in its application to assessees as distinguished from third parties. S. K. Das, J. was inclined to accept this view, though the learned Judge found that it would be sufficient for the purpose of the case before him to invalidate the proviso so far as it affected persons other than the assessees, who were not parties, to the proceedings enumerated in it. Kapur and Sarkar, JJ., who with Das, J. constituted the majority, did not express any opinion on the wider question. It is clear from their judgment that they were prepared to regard the second proviso to section 34 (3) as unconstitutional only in so far as it deprived a third party of the immunity given against the assessment or re-assessment after the expiry of the period of limitation prescribed in the section. Sarkar, J. adopted the reasons given by him in his judgment in a connected case, Commissioner of Income-tax v. Sardar Lakhmir Singh ((1963) 49 I T R 70 (S C)). At page 78, the learned Judge pointed out that the aforesaid proviso would-be invalid only in regard to its operation against third parties. The, judgment of the majority has subsequently been understood as invalidating the proviso only in so far as it removes the bar of limitation with respect to a person other than the assessee: vide the observations of Mudholkar, J. in Income-tax Officer v. Murlidhar Bhagwan Das ((1964) 52 I T R 335, 349 (S C).). Hidayatullah and Raghubar Dayal, JJ., who took the minority view in Prashar v. Vasantsen Dwarkadas upheld the validity of the second proviso. Again in Income-tax Officer v. Murlidhar Bhagwan Das, Mudholkar, J. giving the dissenting judgment on behalf of himself and Raghubar Dayal, J. pointed out that the second proviso to section 34 (3) could not be held to contravene Article 14 of the Constitution, as the discrimination was based upon a reasonable classification, namely, a real difference between assessees with respect to whose escaped income a judicial finding or direction was made by the appellate authority and those with respect to which no judicial finding or direction was made by such authority., The learned Judges took the view that the precise question, namely, the inapplicability of Article 14 to cases where there was a sub-classification, did not form the subject-matter of the decision in the earlier case. Notwithstanding the dissenting opinions of the eminent Judges in the two cases referred to above, the view of the majority of the Judges in Prashar v. Vasantsen Dwarkadas will have to prevail. Das, J., no doubt, gave expression to the view that the second proviso to section 34 (3) would be invalid entirely, i.e., even in relation to proceeding taken as against an assessee who was a party to the previous proceedings in which a finding or direction was given. But this view was only in the nature of obiter dictum, as the learned Judge himself found it unnecessary to go so far for the purpose of the disposal of the case before him. But even so, that observation will be entitled to utmost respect and we would have followed the same but for the fact that the later decisions of the Supreme Court proceeded on the footing that the majority decision in that case should be taken as only invalidating the proviso to the extent of its operation against third parties to the proceedings. We may, in this connection, refer to the case decided along with Prashar's case, namely, Commissioner of Income-tax v. Sardar. Lakhmir Singh. In that case the assessee, Lakhmir Singh, and his father, who once constituted a Hindu undivided family, filed separate returns for their income for the year 1946-47 on the ground that they had become divided. The Income-tax Officer overruled the case of partition and assessed the total income of the two persons as income of a Hindu undivided family. Subsequently, the Appellate Assistant Commissioner, before whom an appeal in regard to the assessment for the earlier year 1945-46 was pending, upheld the plea of the assessees that they had become divided even prior to that year and set aside the assessment for that year. On November 27, 1953, the Incometax Officer proceeded to assess Lakhmir Singh on the basis of his return made for the year 1946-47. Although such an assessment was made more than four years after March 31, 1947, it was argued that the second proviso to section 34 (3) would save .the assessment from the bar of limitation. The majority of the Judges, Das, Kapur and Sarkar, JJ., held that the assessment was invalid, though for different reasons. Das and Kapur, JJ. were of opinion that as the jurisdiction to assess for the year 1946-47 had become barred even before the second proviso to section 34 (3) came into force (that is, April I, 1952), the assessment was invalid. Sarkar, J. as stated earlier, rested his conclusion on the ground that the second proviso to section 34 (3) could not validly operate against third person and that Lakhmir Singh should be regarded as a third person in the assessment proceedings in which his father was sought to be assessed for the year 1945-46. The learned Judges stated at p. 79. "The respondent, Lakhmir Singh, was not the assessee in the section 31 proceedings in consequence of which the assessment order against him was made. The assessee was his father as the karta of anon-existent family. The proviso is invalid against the respondent, Lakmir Singh." (Italics ours). Hidayatullah and Raghubar Dayal, JJ. held that the second proviso to section 34 (3) could validly operate to save the assessment from the bar of limitation. It will be noticed that the case before the Supreme Court just referred to was one where in a divided family the father was sought to be assessed as the karta of a family which in law was non-existence. It was held that any finding reached by the appellate authority in that case about there having been a partition in the family would not enable the Income-tax Officer under section 34 to initiate proceedings against the son, who was not a party to the appal. In other words, the family having been divided, the father could not have represented the son in the proceedings in which he was described as the karta of the family. The son, in such a case, would be a third party to the proceedings initiated against the father, albeit the father was stated to be the karta of the family, and, therefore, the second proviso to section 34 (3) was held not to save the bar of limitation against him. The rule laid down by the majority of the Judges of the Supreme Court in Prashar's case was applied by the Bombay High Court in M. B. Thakur v. S. P: Pande ((1965) 65 I T R 552) even in regard to the assessee himself. With great respect, we are unable to share this view. As we pointed out earlier, the observation of Das, J. in Prashar's case that the second proviso to section 34 (3) would be invalid even against the assessee was a mere obiter and the Supreme Court, in later cases, has understood that case is merely laying down that the second proviso to section 34 (3) would be invalid only against third parties. In regard to actual parties to the assessment, we are unable to see how it can be said to be discriminatory. Even apart from the proviso, it will be open to an appellate authority, who gives a finding of the kind mentioned in the proviso, to remand the proceedings for further investigation by the Income-tax Officer so far as the party is concerned. Such a remand will of course not be possible under section

66. The effect of the second proviso, so far as those who are parties to the appeal are concerned, is to provide a machinery under section 34 to enable investigation afresh in such cases. In short it will be a mere substitute for a remand. So much will be clear on a true interpretation of the terms of the proviso. ??????????? In Income-tax Officer v. Murlidhar Bhagwan Das ((1964) 52 I T R 335 (S C)), the Supreme Court held that the expression "any person". Occurring in that proviso must be held to have been used in a limited sense; having regard to the scope of the subject-matter dealt with by the section, that is, that the 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. After referring to the other provisions of the Act, Subba Rao, J., who spoke for the majority of the Judges, said: "If so construed, we must turn to section 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 section 30 (1) and section 31 (3) of the Act indicates the cases where persons other than the appealing assessees might be affected by order passed by the Appellate Commissioner. Modification or setting aside of assessment made on a firm, joint Hindu family, association of persons, 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 Hindu undivided family 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." This interpretation of the proviso renders it really unnecessary to consider the vires of the second proviso to section 34 (3), as the section itself was not intended to cover those cases. In the judgment above mentioned the Supreme Court has limited the application of the proviso to the year, the assessment of which formed the subject of appeal before the appellate authority. They observed: " . . . we hold that the said proviso would not save the time limit prescribed under subsection (1) of section 34 of the Act in respect of an escaped assessment of a year other than that which is the- subject-matter of the appeal or the revision, as the case may be." It is implicit in the observation above mentioned that the second proviso would be valid so far as the escaped assessment of the year, which formed the subject-matter of the appeal before the appellate authority. The question then is; whether such a finding can lift the bar of limitation on the assessment of other persons of the category enumerated in the observation of Subba Rao, J, to which we have just now made reference. If the assessee, in whose appeal, the appellate authority gave a finding, had a representative capacity, it can reasonably be taken that any finding so given in such assessment, would be binding on those whom he represented. If the individual assessments of those persons are sought to be modified by resort to section 34 (1), in consequence of such a finding, even after the period of limitation had run out, it can be said that the proviso would apply to them. But it is unnecessary to consider whether that is so or not in the instant case. Here Karuppan Chettiar has been found to be divided from his son, Muthukaruppan Chettiar, on February 7, 1951. Therefore, at the time when he submitted the returns, he did not purport to and indeed would have no right to present his son. Hence, the finding of the Appellate Assistant Commissioner, in his case, could not bind his son, Muthukaruppan Chettiar. On the principles laid down in Income-tax Officer v. Murlidhar Bhagwan Das, his case will not be covered by the proviso. On this ground alone, the assessment under section 34 against him for the, years 1950-51 and 1951-51 will have to be considered invalid, as the notice under section 34 was issued beyond the period prescribed. But, as w e pointed out earlier, the assessment of Muthukaruppan Chettiar for the year 1952-53 would be valid as the notice under section 34 was issued within the period of four years from the end of the year of assessment. It is, however, argued by Mr. Narayanaswami for the assessee that as the returns submitted by Muthukaruppan Chettiar had merely been closed, they should be deemed to be still pending, and that, therefore, the Income-tax Officer would have no jurisdiction to initiate proceedings under section 34 in respect of the years for which the returns had been filed and were still pending. But this contention ignores the fact that the Income-tax Officer closed the returns with the remark "no assessment". That is a lawful termination of the assessment proceedings and it would, therefore, be competent to the Income=tax Officer to initiate proceedings under section

34. If authority were needed for that proposition, we can refer to M. Ct. Muthumraman v. Commissioner of Incometax ((1963) 50 I T R 656). From what we have stated above, it will be clear that the second proviso to section 34 will be valid to remove the bar of limitation so far as assessees, who are actual parties to the appeal, are concerned. Karuppan Chettiar was a patty to the appeal in which the Appellate Assistant Commissioner gave a finding that he could not be assessed as the karta of a Hindu undivided family. That finding necessitated the assessment of income received by him as an individual. The proceedings initiated against him on March 2, 1957, will, therefore, be valid. It is true that the proceedings before the Appellate Assistant Commissioner were taken as if he was the karta of an undivided Hindu family, but no such family existed at that time. Karuppan Chettiar could have only represented himself in those proceedings. Indeed the original return on the basis of which the finding in appeal was given was filed by him only as an individual. Learned counsel for the assessee submitted that, inasmuch as a Hindu undivided family is a distinct unit of assessment, Karuppan Chettiar, in his individual capacity, could not be 'deemed to have been a party before the Appellate Assistant Commissioner. Reliance in this connection was placed on the observations of Sarkar, J. in Commissioner of Income-tax v. Sardar Lakhmir Singh. But that case was the converse of the one we are now having. There, the assessment under section 34 was made on a junior member of a divided family, who was not eo nomine a party to the, proceeding in appeal. The family having already been divided, and the father who was formerly the karta and who was alone the party to the appeal, could not represent him. But, here, although the family was non-existent, the father could and did represent himself alone. Learned counsel for the assessee that contended that by reason of the order of the Appellate Assistant Commissioner upholding the plea of partition, the original return filed by Karuppan Chettiar for the three years in question must be deemed to have been revived and kept pending, and that, therefore, there could be no resort to section

34. It is, no doubt, correct to say that the original return was filed by Karuppan Chettiar only as an individual. But the Income-tax Officer treated as one on behalf of the family. The Appellate Assistant Commissioner merely set aside, the assessment on the footing that the family being non-existent after partition, could not be assessed. He too treated the return as one by the karta of the family, as otherwise he would have remitted the case back to the Income-tax Officer for assessing Karuppan Chettiar in his individual capacity. Under the circumstances, it cannot be held that the original return is now pending. Further we may point that this objection to the proceedings initiated by the Income-tax Officer under section 34 against Karuppan Chettiar was not taken before any one of the appellate authorities. The question, therefore, does not arise on the order of the Tribunal. Hence, we cannot permit the assessee to raise this point before us. The result is that the assessment of Karuppan Chettiar, for the three years in question must be regarded as valid. We answer the question referred to us in T. C. No. 157 of 1960, in the affirmative and against the assessee who will pay the costs of the Department. Counsel's fee Rs.

250. As regards T. C. No. 156 of 1960, we answer the question in affirmative and against the assessee so far as the year 1952-53 is concerned. But with respect to the other two years, namely, 1950-51 and 1951-52, the assessments will be invalid. The question in regard to those years will have to be answered in the negative and in favour of the assessee. There will be no order as to costs in this case.