Commissioner of Income-Tax, Madras vs Mtt. Ar. S. Ar. Arunachalam Chettiar

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 10 and 10-A of 1952

Decision Date: 22 December 1952

Coram: Mehr Chand Mahajan, Natwarlal H. Bhagwati, Das

In the case titled Commissioner of Income-Tax, Madras versus Mtt. Ar. S. Ar. Arunachalam Chettiar, the judgment was delivered on 22 December 1952 by the Supreme Court of India. The bench that heard the matter included Justice Mehr Chand Mahajan and Justice Natwarlal H. Bhagwati. The petitioner was the Commissioner of Income-Tax, Madras and the respondent was Mtt. Ar. S. Ar. Arunachalam Chettiar. The same date, 22 December 1952, is recorded for the judgment, and the bench is also referenced as comprising Judges Das and Sudhi Ranjan in certain reproductions of the report. The citation for this authority appears as 1953 AIR 118 and 1953 SCR 463, with additional citator references including F 1956 SC 367 (12), RF 1961 SC 1633 (10, 25) and F 1969 SC 1068 (6). The statutory framework discussed in the decision involves the Indian Income-Tax Act of 1922, specifically sections 30, 33, 34 and the two clauses of section 66 (1) and (2).

The headnote summarizes the factual and procedural history. On 20 August 1943 the Appellate Tribunal issued an order directing that certain deductions claimed by the assessee should be allowed. The matter was then returned to the Income-Tax Officer, who on 26 September 1945 made a further order but did not issue a fresh notice of demand. The assessee challenged this order before the Appellate Assistant Commissioner, alleging that the Income-Tax Officer had improperly included a sum of Rs 13,000 60 464 as unassessed foreign income of earlier years. The Appellate Assistant Commissioner held that the order dated 26 September was not appealable. Consequently, the assessee filed a miscellaneous application before the Appellate Tribunal. The Tribunal found that the Income-Tax Officer had erred in including the said sum at that stage and directed the Officer to revise his computation accordingly.

The Commissioner of Income-Tax contended that the Appellate Tribunal lacked jurisdiction to entertain or pass such an order on a miscellaneous application. He therefore sought a reference to the High Court under section 66 (1) of the Income-Tax Act. The Tribunal referred certain questions to the High Court, which in turn directed the Tribunal to refer additional questions. When the references were finally considered, the High Court held that the references were incompetent. The Commissioner then appealed to the Supreme Court with the leave of the High Court. The Supreme Court held, first, that in complying with the Tribunal’s directions and in passing the order of 26 September 1945, the Income-Tax Officer could not be said to have acted under section 23 or section 27 of the Act, and therefore no appeal lay from his order under section 30 (1). Secondly, the order made by the Appellate Assistant Commissioner was not an order under section 31 (3), and consequently no further appeal lay to the Appellate Tribunal under section 33 (1) that would permit the Tribunal to make an order under section 33 (4). Since there was no order under section 33 (4), the Court concluded that no question of law arose from an order under that provision.

It was held that no valid reference could be made under section 66(1) or section 66(2) of the Income-Tax Act. Even if the order issued by the Income-Tax Officer on 26 September 1945 were treated as an order under section 23 or section 27, and therefore appealable, the subsequent order of the Appellate Assistant Commissioner refusing to entertain the appeal was not made under any sub-section of section 31. Consequently, no appeal could be taken from that order to the Appellate Tribunal under section 33(1), and the Appellate Tribunal could not issue an order under section 34(1). Moreover, the order of the Appellate Tribunal that corrected the Income-Tax Officer’s decision and directed that the sum of Rs 13,541 should be excluded could not be classified as an order under section 33(4); therefore, it did not attract the operation of section 66(1) or section 66(2).

The matter came before the Supreme Court on civil appeals numbered 10 and 10-A of 1952. These appeals challenged the judgment and order dated 11 January 1950 delivered by the High Court of Judicature at Madras in the two referred cases, numbered 80 of 1946 and 38 of 1948. The appellant was represented by counsel for the Attorney-General of India, while counsel for the respondent appeared for the other side. The judgment was pronounced on 22 December 1952 by Justice DAS.

The two consolidated appeals were directed against the High Court’s decision that, relying on an earlier decision in Commissioner of Income-Tax, Madras v. B. R. M. S. Sevugan alias Manickavasagam Chettiar, found the references under section 66 to be incompetent and consequently declined to answer the questions that had been raised. The respondent, identified as a Nattukotai Chettiar, maintained his headquarters at Karaikudi in India and operated a money-lending business through branches located at Maubin, Kuala Lumpur and Singapore. He also derived income from properties situated in Maubin and Singapore.

For the assessment year 1941-42, the Income-Tax Officer computed the assessee’s accrued foreign income as follows: Rs 29,403 from Maubin, Rs 27,731 from Kuala Lumpur and Rs 34,584 from Singapore, amounting in total to Rs 91,718. After allowing a deduction of Rs 4,500 under the third proviso to section 4(1) of the Act, the assessable foreign income was reduced to Rs 87,218. Of the total remittances of Rs 84,352, the Officer allocated Rs 7,900 to the accrued income of Maubin, Rs 62,315 to the income from Kuala Lumpur and Singapore, and the remaining Rs 14,137 to taxed income of earlier years. The Officer disallowed the assessee’s claims for deductions under several heads. Based on the total foreign income of Rs 67,218 and income from other sources, the Income-Tax Officer calculated that the assessee was liable to pay Rs 23,268 on account of income-tax, super-tax and the applicable surcharges.

By the assessment order dated 31 January 1942, the tax authority required the assessed amount to be paid on or before 25 February 1942. The taxpayer filed an appeal to the Appellate Assistant Commissioner challenging the disallowance of several items of his claim, including replantation expenses of $498 incurred at Kualalumpur and a bad debt of $15,472 incurred at Singapore. In the order dated 25 May 1942, the Appellate Assistant Commissioner permitted some of the objections raised by the taxpayer but maintained the disallowance of the replantation expenses and the bad debt, thereby reducing the assessment to Rs. 22,548. Unsatisfied with that decision, the taxpayer pursued a further appeal before the Appellate Tribunal, contending that the two disallowed items should be allowed. The Appellate Tribunal, by its order dated 20 August 1943, held that the replantation expenses “will be allowed to the appellant as expenses” and that the bad debt was permissible, declaring that “the deduction claimed will, therefore, be allowed.” Consequently, the Tribunal allowed the appeal in part.

The matter returned to the Income-Tax Officer on 26 September 1945. The officer deducted Rs. 778 as replantation expenses, which reduced the Kualalumpur income to Rs. 26,953, and deducted Rs. 24,175 as the bad-debt allowance, which lowered the Singapore income to Rs. 10,409. Adding these two reduced figures to the Maubin income of Rs. 29,403 produced a total accrued foreign income of Rs. 66,765. From this total, Rs. 4,500 was deducted under the third proviso to section 4(1) of the Act as unremitted profits of Maubin, leaving a net accrued income of Rs. 62,265. Regarding the remittances, the officer allocated Rs. 7,000 to the accrued income of Rs. 29,403 from Maubin and Rs. 37,362 to the combined accrued incomes of Kualalumpur and Singapore. He further allocated Rs. 24,549 as remittances arising from assessed profits of earlier years, which left a balance of Rs. 13,541. The officer treated this Rs. 13,541 as remittances of unassessed income from earlier years and held it to be assessable to tax. Adding this amount to the net accrued income of Rs. 62,265 yielded a total foreign income of Rs. 75,806 for the year.

Based on the total foreign income and other sources of income, the Income-Tax Officer recalculated the liability for income tax, super-tax and surcharges at Rs. 22,802-6-0. After granting credits for certain amounts, he determined that a balance of Rs. 21,211-14-0 remained due. By his order dated 26 September 1945, he directed that this balance be paid in equal halves, one portion on or before 30 September 1947 and the other on or before 31 March 1948. The officer, however, did not issue a notice of demand under section 29 of the Act. Feeling aggrieved by the inclusion of the Rs. 13,541 as alleged unassessed foreign income of earlier years that had been remitted to India during the accounting year, the taxpayer filed an appeal.

The appeal was presented before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the assessee did not possess a right of appeal under section 30 of the Act because there had been no assessment made under section 23 and, moreover, no notice of demand had been served on the assessee pursuant to section 29 of the Act. Consequently, by an order dated 19 November 1945, the Appellate Assistant Commissioner declined to admit the appeal. In that order, however, he expressed the view that the assessee might obtain relief by filing a miscellaneous application with the Appellate Tribunal, alleging that the Income-tax Officer had either misconstrued the facts or had failed to give effect to the order of the Appellate Tribunal. Following this indication, the assessee duly filed a miscellaneous application before the Appellate Tribunal. The Tribunal examined the matter and held that the Income-tax Officer’s finding—that the amount of Rs 13,541 should be treated as untaxed profits of earlier years remitted to India in the present accounting year—did not arise out of the process of giving effect to the Tribunal’s own earlier order. By an order dated 20 February 1946, the Tribunal therefore set aside that finding and directed the Income-tax Officer to recompute the assessment in accordance with the correct principles. The Tribunal’s order was served on the Commissioner of Income-tax, Madras, on 8 March 1946. Subsequently, on 1 May 1946, the Commissioner filed an application before the Appellate Tribunal under section 66(1) of the Act, requesting that three questions he had formulated in his petition be referred to the High Court. The Commissioner contended that the Tribunal lacked jurisdiction to entertain, consider, and pass the order it had issued on the miscellaneous application because the proceeding was neither an appeal under section 33 of the Income-tax Act nor could it be characterised as a rectification under section 35 of any mistake made by the Bench. The Appellate Tribunal, however, observed that although the Act contained no specific provision granting it the power to give effect to its own order or to resolve any ambiguity in such an order through a later miscellaneous application, such power was nevertheless inherent in the Tribunal. Accordingly, the Tribunal concluded that a point of law had arisen and, on 23 August 1946, referred the following question to the High Court: “Whether, in the facts and circumstances of this case, the order of the Bench dated 20 February 1946, issued in the miscellaneous application, is an appropriate order, is legally valid, was passed within jurisdiction, and is binding on the Income-tax Officer.” The Tribunal declined to refer the other questions presented by the Commissioner. This reference was recorded as Case Referred No. 80 of 1946. Later, pursuant to an order of the High Court dated 30 March 1948, issued on the Commissioner’s application under section 66(2) of the Act, the Tribunal made an additional reference to the High Court, asking: “If the answer to the question already referred to the High Court by the order of 23 August 1946 is affirmative, whether, in the circumstances and on the facts of the case, the recomputation made by the Income-tax Officer pursuant to the Tribunal’s decision in R.A.A. No. 53 (Madras) of 1942-43 was valid and correct.”

The Appellate Tribunal, in its order dated 23 August 1946, answered affirmatively the question it had been asked and further inquired whether, given the circumstances and facts of the case, the recomputation carried out by the Income-tax Officer pursuant to the Tribunal’s decision in R.A.A. No 53 (Madras) of the assessment year 1942-43 was both valid and correct. Subsequently, on 19 July 1948, the Tribunal issued another reference, which was recorded as Case Referred No 38 of 1948. Both of these referred matters were placed before a Bench of the Madras High Court. The Bench held that the reference made under section 66(1) of the Income-Tax Act was incompetent, relying on an earlier decision of that Court which it considered to be binding. In consequence, the High Court declined to answer the questions posed in the references. Following this, the Commissioner of Income-tax applied for leave to appeal to this Court from the High Court’s decisions in both references. The Commissioner was granted such leave on the condition that he would undertake to pay the costs of the assessee whatever the outcome. The two separate appeals were then consolidated and have been presented before this Court for final determination.

Section 66-A(2) of the Act provides that an aggrieved party may appeal to this Court from any judgment of a High Court rendered on a reference made under section 66, provided the High Court certifies the matter to be fit for appeal. Section 66(5) further stipulates that, upon hearing a case referred to it under sections 66(1) and 66(2), the High Court must decide the questions of law raised and deliver a judgment containing the reasons for its decision. During the opening of the present case, the Attorney-General raised the issue of whether the High Court’s mere refusal to entertain the reference, on the ground that it was incompetent, constituted a “decision and judgment” as contemplated by section 66(5), and therefore gave rise to a statutory right of appeal to this Court. While the Attorney-General argued that the High Court’s refusal did fall within the meaning of section 66(5), he prudently requested that the appeal be treated as one on special leave under article 136 of the Constitution. The counsel for the assessee did not oppose this request, and consequently this Court granted leave under article 136 and proceeded to hear the appeal on that basis. In view of these circumstances, the Court finds it unnecessary to opine on the appealability of the High Court’s order under section 66-A. The Attorney-General further contended that the decision relied upon by the High Court was inapplicable to the facts of the present case. In that regard, it is noted that the Tribunal, by its order dated 11 July 1944, had allowed an appeal from the Appellate Assistant Commissioner and cancelled the assessment which

In this case, the Tribunal had earlier issued an order on July 11, 1944 cancelling an assessment that was held to be illegal, and that order was served on the Commissioner shortly thereafter. On October 5, 1944 the Income-tax Officer filed an application under section 35 with the Tribunal seeking to correct a statement of facts contained in that order. More than sixty days after the Commissioner received the July 11 order – specifically on October 7, 1944 – the Commissioner made an application under section 66(1) of the Act, requesting that the Tribunal refer to the High Court the question of the correctness of its decision embodied in the July 11 order. Both applications were disposed of on the same day, January 17, 1945, when the application for rectification under section 35 was granted and the case was stated for the opinion of the Court as prayed. Section 66(1) requires that an application for reference be made within sixty days of the date on which the applicant is served with notice of an order made under sub-section (4) of section 33. The Court held that the order granting rectification under section 35, which merely corrected an error in the earlier order, was not an order made under section 33(4); consequently, the sixty-day limitation in section 66(1) did not apply to the Commissioner’s application. The Court further observed that if the Appellate Tribunal improperly or incorrectly makes a reference in violation of the statute, the High Court may entertain an objection to the statement of the case and, if it concludes that the case should not have been stated, the High Court is not compelled to give an opinion on the question referred. In the present case there is no dispute that the Commissioner’s application was out of time. The contention advanced is that section 66(1) contemplates only an application for reference of a question of law arising out of “such order,” the term “such order” referring expressly to an order made under section 33(4). Accordingly, if no valid order exists under that provision, no question of law can arise from “such order,” and the Appellate Tribunal would lack jurisdiction to refer any matter to the High Court under section 66(1). Section 66(2) provides that where an application under sub-section (1) is refused by the Tribunal on the ground that no question of law arises, the assessee or the Commissioner may apply to the High Court within the time specified, and the High Court may, if dissatisfied with the Tribunal’s decision, require the Tribunal to state the case and refer it. The High Court’s jurisdiction under sub-section (2) is therefore conditional upon a refusal of a valid application under sub-section (1). This presupposes that the application under sub-section (1) was otherwise valid. Hence, if an application under sub-section (1) is not well-founded because there is no order that can be characterised as one under section 33(4), the Tribunal’s refusal to state a case on that misconceived application will not empower the High Court, under sub-section (2), to direct the Tribunal to state a case. The Tribunal’s and the High Court’s jurisdiction thus depends on the existence of an order by the Tribunal that can be described as made under section 33(4) and on a question of law arising out of that order. The remaining issue for consideration is whether, in the present circumstances, any question of law arose from an order that can properly be said to have been made by the Tribunal under section 33(4); if not, the jurisdiction to refer does not arise.

It was observed that the starting point for the jurisdiction of the High Court under section 66(2) was the existence of a valid application made under subsection (1). Consequently, if an application filed under subsection (1) was not well-founded because there was no order that could be described as an order made under subsection (4) of section 33, then the refusal of the Appellate Tribunal to state a case on the ground that no question of law arose would not empower the High Court, even on an application under subsection (2) of section 66, to command the Tribunal to state a case. The Court therefore emphasized that the jurisdiction of both the Tribunal and the High Court was conditioned upon the presence of an order by the Appellate Tribunal that could be said to fall within section 33(4) and upon the existence of a legal question arising from such an order. The only issue for the Court’s determination, therefore, was whether, in the present matter, any question of law had arisen from an order that could properly be described as one made by the Appellate Tribunal under subsection (4) of section 33. If no such question of law existed, then the Appellate Tribunal would lack jurisdiction under subsection (1) of section 66 to refer a case, and the High Court would likewise lack jurisdiction under subsection (2) of the same provision to direct the Tribunal to do so.

The learned Attorney-General at one stage suggested that the matter might first be remitted to the High Court for its determination of the question. However, the Court noted that the question was purely one of law involving the construction of the relevant sections of the Act, and that it would be more efficient for the Court to decide the issue at this stage. The Court affirmed that it possessed the authority, while hearing the present appeal, to determine the question. The factual backdrop was recalled: on 19 November 1945 the Appellate Assistant Commissioner declined to admit an appeal, and the assessee did not file a formal appeal but instead made a miscellaneous application before the Appellate Tribunal. No provision in the Act authorized such a miscellaneous application. The Tribunal, in its statement of the case, claimed that it entertained the application and corrected the error of the Income-Tax Officer by exercising what it considered its inherent powers. Since there was no appeal under section 33(1) and the order was made in exercise of what the Tribunal described as its inherent jurisdiction, the order could not be characterised as one under section 33(4). In the absence of an order under section 33(4) there could be no reference under section 66(1) or (2), and consequently the appellate court was justified in refusing to entertain the application. The Attorney-General argued that a narrow and technical approach should be avoided and that the miscellaneous application should be treated as a proper appeal under section 33. The Court then turned to examine the provisions of section 33, noting that any assessee objecting to an order passed by an Appellate Assistant Commissioner under section 28 or section 31 may appeal to the Appellate Tribunal.

The Court observed that under section 33(1) an assessee may prefer an appeal to the Appellate Tribunal within the period prescribed in sub-section (1), and that the Tribunal may extend this period under sub-section (2A). Section 33(4) then empowers the Tribunal, after giving both parties an opportunity to be heard, to pass any order it deems appropriate. Consequently, the Tribunal can issue an order under section 33(4) only when it is dealing with an appeal from an order made by the Appellate Assistant Commissioner under either section 28 or section 31. In the absence of an order that can properly be said to have been made by the Assistant Commissioner under those provisions, there can be no appeal within the meaning of section 33(1), and therefore the Tribunal is unable to make an order under section 33(4). The Court noted that section 28 is not relevant to the present difficulty. Section 30, on the other hand, provides for the filing of appeals against assessments made under the Act. Sub-section (1) of that section specifies the various decisions against which an appeal may lie; sub-section (2) sets out the time limit for filing such an appeal; and sub-section (3) prescribes the form in which the appeal must be made. Section 31 confers on the Appellate Assistant Commissioner the power to hear and dispose of an appeal governed by section 30. Specifically, sub-section (3) of section 31 authorises the Assistant Commissioner, while disposing of an appeal under section 30, to make an order under any of the several clauses contained in that sub-section. Hence, for the Assistant Commissioner to exercise his jurisdiction and to make an order under section 31, a proper appeal as contemplated by section 30 must first exist. The learned Attorney-General relied only on the introductory phrase of sub-section (1) of section 30 and argued that the appeal before the Assistant Commissioner concerned the amount of income assessed under section 23 or section 27. The Court recalled that the Appellate Tribunal had held that the two sums claimed by the assessee would be allowed and had expressed its conclusion by stating that the appeal was partly allowed.

The Court further explained that the power conferred on the Tribunal by section 33(4) is indeed wide, because on a properly before-them appeal the Tribunal may make any order it thinks fit. Accordingly, the order issued by the Tribunal on 20 August 1943 must be interpreted as a direction to the Income-Tax Officer to implement the Tribunal’s decision by allowing the two deductions in dispute. When the matter later returned to the Income-Tax Officer, his sole function was to give effect to the Tribunal’s direction; he could not reopen the assessment that he had originally made under section 23. Therefore, in carrying out the Tribunal’s directions on 26 September 1945, the Income-Tax Officer could not be said to have acted under the authority of section 23. The Court thus concluded that the Tribunal’s order was a valid exercise of its powers under section 33(4) and that the subsequent actions of the Income-Tax Officer were limited to the implementation of that order, not a fresh assessment under section 23.

In this case the Court observed that the order of the Income-tax Officer was made under section 23 or section 27 of the Act and that, consequently, no appeal could be filed against that order under section 30(1) of the Act. Because an appeal under section 30(1) did not exist, the Appellate Assistant Commissioner did not have a proper appeal before him as contemplated by that provision. Therefore the order issued by the Appellate Assistant Commissioner could not be treated as an order made by him under section 31(3), since an order under section 31(3) may be passed only when disposing of an appeal properly filed under section 30. As a result, no further appeal was available to the Appellate Tribunal under section 33(1), and the Tribunal therefore lacked the jurisdiction to make an order under subsection (4) of that section.

The Court further held that, because there was no order properly made under section 33(4), no question of law could arise from an order made under that provision. Accordingly, there could be no valid reference to the High Court under section 66(1) or section 66(2). If the reference was incompetent for want of jurisdiction under either subsection of section 66, the High Court was justified in declining to entertain it, as it had done. The Court noted that even if the order dated 26 September 1945, issued by the Income-tax Officer after the matter returned to him to implement the Appellate Tribunal’s decisions, were regarded as an order made by him under section 23 or section 27 and therefore appealable under section 30(1), the subsequent order of the Appellate Assistant Commissioner dated 19 November 1946, refusing to admit the appeal, clearly amounted to a refusal to exercise the jurisdiction vested in him by law.

Such a refusal, founded on an error of jurisdiction, could be corrected by appropriate proceedings, but it could not be treated as an order contemplated by any of the subsections of section 31. Because that order did not fall within the scope of section 28 or section 31, no appeal lay from it to the Appellate Tribunal under section 33(1). In the absence of a proper appeal before the Tribunal, it could not validly make an order under section 33(4), and without an order under that provision there could be no reference under either subsection of section 66. The Court concluded that the Tribunal’s order correcting the Income-tax Officer’s decision to exclude the sum of Rs 13,541 from the assessment could not be regarded as an order passed under section 33(4) and therefore did not attract the operation of section 66.

The learned Attorney-General argued that, under section 66(2) of the Act, once the Appellate Tribunal was directed to state a case, the High Court could not subsequently refuse to answer the question referred to it. While the Court noted that deciding whether the High Court was thereby precluded was not necessary for the present determination, it affirmed that, even assuming such a preclusion, the competency of the reference could still be examined. Consequently the Court dismissed the appeals with costs.

In this case, the Court observed that once a question was formally referred to the High Court, that higher tribunal could not thereafter decline to answer the specific question that had been placed before it. The Court further clarified that it was unnecessary for it to make a definitive determination on the precise issue of whether the High Court was, in fact, precluded from dealing with the reference in the circumstances that had arisen. Even assuming, for the sake of argument, that the High Court might have been precluded, the Court held that it retained full authority to examine the separate issue concerning the competence of the reference itself under the relevant statutory provisions. Accordingly, after reviewing the material before it, the Court concluded that the appeals raised by the parties did not disclose any error or jurisdictional defect that would warrant reversal, and therefore ordered that the appeals be dismissed. In addition to dismissal, the Court directed that the costs of the proceedings be awarded against the appellant, thereby placing the expense of the unsuccessful appeals on that party. The official record identifies the legal representatives appearing for the parties: counsel for the appellant was G.H. Rajadhyaksha, while counsel for the respondent was M. S. K. Aiyangar.