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: Not extracted

Decision Date: 22 December, 1953

Coram: Mehr Chand Mahajan, Das

The case titled Commissioner of Income-Tax, Madras versus Mtt. Ar. S. Ar. Arunachalam Chettiar was decided on 22 December 1953 by the Supreme Court of India. The judgment was written by Justice Mehr Chand Mahajan, who also constituted the bench that heard the matter. The two appeals that were brought together in this proceeding were directed against a judgment and order dated 11 January 1950, which had been issued by the High Court of Judicature at Madras. The High Court had been seized of References No 80 of 1946 and No 38 of 1948, both of which were filed under section 66 of the Indian Income-Tax Act. In reaching its decision, the High Court relied upon an earlier decision in Commissioner of Income-Tax, Madras v. R. Rm. M. Sm. Sevugan alias Manickavasagam Chettiar, and held that the references were incompetent. Consequently, the High Court declined to answer any of the questions that had been raised in the references.

The respondent, who belonged to the Nattukotai Chettiar community, maintained his principal residence and headquarters at Karaikudi in India. In addition to his activities in India, he operated a money-lending business through branches located at Maubin, Kuala Lumpur and Singapore, and he also owned income-producing properties in Maubin and Singapore. For the assessment year 1941-42 the Income-Tax Officer calculated the respondent’s accrued foreign income as follows: Rs 29,403 from Maubin, Rs 27,731 from Kuala Lumpur and Rs 34,584 from Singapore, making a total of Rs 91,718. After deducting Rs 4,500 that was permitted under the third proviso to section 4(1) of the Act, the officer arrived at a total assessable foreign income of Rs 87,218. Of the total remittances of Rs 84,352, the officer allocated Rs 7,900 to the accrued income of Maubin and Rs 62,315 to the combined accrued incomes of Kuala Lumpur and Singapore, while the remaining Rs 14,137 was attributed to taxable income of earlier years. The officer disallowed the assessee’s claim for deductions under several heads and, on the basis of the total foreign income of Rs 67,218 together with income from other sources, computed a tax, super-tax and surcharge liability of Rs 23,266-8-0. By assessment order dated 31 January 1942, the officer required the assessee to pay the amount on or before 25 February 1942.

The assessee subsequently filed an appeal before the Appellate Assistant Commissioner, challenging the disallowance of several items, including a claim for replantation expenses of $498 incurred at Kuala Lumpur and a claim for a bad debt of $15,472 arising in Singapore. By order dated 25 May 1942, the Appellate Assistant Commissioner allowed some of the objections raised by the assessee but retained the disallowance of the replantation expense and the bad-debt claim, thereby reducing the assessment liability to Rs 22,548. The assessee then lodged a further appeal before the Appellate Tribunal, seeking reversal of the disallowances of those two specific items. In its order dated 20 August 1943, the Tribunal held that the replantation expenses “will be allowed to the appellant as expenses” and that the bad debt “was permissible and the deduction claimed will, therefore, be allowed.” As a result of the Tribunal’s findings, the appeal was partially allowed, overturning the earlier disallowances of the replantation expense and the bad-debt deduction.

The case returned to the Income-tax Officer on 26 September 1945, when the officer applied a deduction of Rs 778 for re-plantation expenses against the Kualalumpur income, reducing that income to Rs 26,953. A further deduction of Rs 24,175 was allowed for the bad-debt claim, which lowered the Singapore income to Rs 10,409. Adding these two reduced amounts to the income of Rs 29,403 derived from Maubin produced a total accrued income of Rs 66,765. From this aggregate, the officer deducted Rs 4,500 on the basis of unremitted profits of Maubin under the third proviso to section 4(1) of the Act, leaving a net balance of Rs 62,265. The officer then allocated the remittances received, assigning 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. An additional allocation of Rs 24,549 was made against assessed profits of previous years, resulting in a residual amount of Rs 13,541. The officer treated this residual as remittances of earlier-year unassessed income and held it to be assessable to tax. By adding the Rs 13,541 to the net accrued income of Rs 62,265, the officer arrived at a total foreign income figure of Rs 75,806. Using this foreign income together with other income, the officer recalculated the tax, super-tax and surcharges, arriving at a liability of Rs 22,802-6-0. After granting credits for certain amounts, the balance payable was fixed at Rs 21,211-14-0. By order dated 26 September 1945, this balance was directed to be paid in equal halves on or before 30 September 1947 and 31 March 1948, although no notice of demand under section 29 of the Act was issued.

Aggrieved by the inclusion of the Rs 13,541 as alleged unassessed foreign income of earlier years remitted to India during the year of account, the assessee filed an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the assessee lacked a right of appeal under section 30 of the Act because no assessment under section 23 had been made and no notice of demand under section 29 had been served; consequently, the appeal was not admitted by order dated 19 November 1945. The commissioner, however, suggested that the assessee might obtain relief by filing a miscellaneous application to the Tribunal, claiming that the Income-tax Officer had either misinterpreted or failed to give effect to the Tribunal’s earlier order. The assessee consequently filed such a miscellaneous application before the Appellate Tribunal. The Tribunal found that the Income-tax Officer’s determination that Rs 13,541 represented untaxed profits of earlier years remitted to India in the accounting year did not arise from giving effect to the Tribunal’s own order. Accordingly, by its order of 20 February 1946, the Tribunal cancelled that finding and directed the Income-tax Officer to revise the computation in line with the Tribunal’s decision.

After the Income-tax Officer received the order dated February 20 1946, the order was served on the Commissioner of Income-tax, Madras, on 8 March 1946. On 1 May 1946 the Commissioner filed an application before the Appellate Tribunal under section 66(1) of the Income-Tax Act, requesting that three questions he had formulated in his petition be referred to the High Court. The Commissioner asserted that the Tribunal lacked legal jurisdiction to entertain, consider, and pass the order that it had made in the miscellaneous application, because the proceeding was neither an appeal under section 33 of the Act nor could it be treated as a rectification under section 35 of any mistake of the Bench. The Appellate Tribunal, however, held that although the statute did not contain an explicit provision empowering it to give effect to its own order or to clarify any ambiguity by a later order in a miscellaneous application filed by a party, such power was nonetheless inherent in the Tribunal. Consequently the Tribunal concluded that a point of law had arisen and, on 23 August 1946, it 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, legally valid, passed within jurisdiction, and binding on the Income-tax Officer.” The Tribunal declined to refer the remaining questions formulated by the Commissioner. This reference was recorded as case Referred No. 80 of 1946. Subsequently, following 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 referred another question to the High Court: “If the answer to the question already referred to the High Court by the order of the Appellate Tribunal dated 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 decision of the Appellate Tribunal in R.A.A. No. 53 (Madras) of 1942-43 was valid and correct.” This further reference was made on 19 July 1948 and was recorded as Case Referred No. 38 of 1948. Both referred matters were then placed before a Bench of the Madras High Court, which held that the reference under section 66(1) was incompetent in view of the earlier decision of that Court, which it considered binding, and accordingly declined to answer the questions. The Commissioner of Income-tax subsequently applied for and obtained leave to appeal to this Court from the High Court’s decisions on both references, obtaining such leave on the condition that he would pay the costs of the assessee in any event. The two appeals were thereafter consolidated and have come before this Court for final determination.

Section 66-A(2) of the Income-Tax Act provides that a party who is aggrieved may appeal to this Court from any judgment of the High Court that is delivered on a reference made under section 66, provided the High Court certifies that the matter is fit for appeal to this Court. Section 66(5) further directs that when a case is referred to the High Court under sections 66(1) and 66(2), the High Court must hear the case, decide the questions of law that are raised, and then deliver a judgment which sets out the grounds on which its decision is based. At the commencement of the proceedings, the learned Attorney-General raised the issue of whether a simple refusal by the High Court to hear the reference—on the ground that the reference itself was incompetent—constituted a “decision and judgment” within the meaning of section 66(5), and therefore attracted the right of appeal provided by section 66-A(2). While the Attorney-General argued that the High Court’s refusal did fall within the scope of section 66(5), he also requested, for the sake of procedural safety, that the appeal be treated as one filed under the special leave provision of article 136 of the Constitution. The counsel representing the assessee-respondent did not oppose this request. Consequently, this Court granted leave to the appellant under article 136 and proceeded to treat the present matter as an appeal filed pursuant to that special leave. In view of this treatment, the Court found it unnecessary to express any opinion on whether the High Court’s order was appealable under section 66-A of the Act.

The learned Attorney-General further submitted that the decision relied upon by the High Court did not apply to the facts of the present case. He explained that the Tribunal, by its order dated 11 July 1944, allowed an appeal from the Appellate Assistant Commissioner and set aside the assessment, holding that the assessment was illegal. That order was served on the Commissioner shortly after it was issued. On 5 October 1944, the Income-Tax Officer filed an application before the Tribunal under section 35 seeking to correct a statement that appeared in the facts section of the Tribunal’s order. More than sixty days after the service of the 11 July 1944 order—specifically on 7 October 1944—the Commissioner filed an application under section 66(1) of the Act, requesting that the Tribunal refer to the High Court the question of correctness of the decision embodied in the 11 July 1944 order. Both the application for rectification and the application for reference were disposed of on the same day, 17 January 1945, when the rectification request was granted and the matter 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. It was held that the

The Court explained that the approval of an application for rectification under section 35, which merely corrected an error in the order, did not constitute an order made under section 33(4). Consequently, such a rectification order could not be the subject of a case statement permitted by section 66(1). The Court further observed that when the Appellate Tribunal makes an improper or erroneous reference in breach of the statute, the High Court is still empowered to entertain an objection to the statement of the case. However, if the High Court concludes that the case should not have been stated, it is not obligated to render an opinion on the question that was referred. In the present matter, the Court noted that the application in question was undeniably filed outside the prescribed time limit. Nevertheless, the argument presented was that section 66(1) only allows an application for reference of a question of law arising from “such order,” a phrase that the Court interpreted to mean an order issued under section 33(4). Accordingly, if there is no valid order under section 33(4), no question of law can arise from “such order.” As a result, the Appellate Tribunal would have no jurisdiction to make a reference to the High Court under section 66(1). The Court then turned to the provisions of section 66(2), which state that when an application under sub-section (1) is made and the Tribunal refuses to state the case on the ground that no question of law arises, the assessee or the Commissioner may, within a specified period, apply to the High Court. Under section 66(2), the High Court may, if it is not satisfied with the Tribunal’s decision, require the Tribunal to state the case and to refer the matter. The jurisdiction conferred on the High Court by sub-section (2) is expressly conditioned upon the Tribunal’s refusal to state a case on an application made under sub-section (1). This condition implies that the application under sub-section (1) must be a valid one, otherwise the High Court’s power under sub-section (2) does not arise.

The Court therefore concluded that both the Tribunal’s and the High Court’s jurisdictions are contingent upon the existence of an order by the Tribunal that qualifies as one under section 33(4) and upon the emergence of a question of law from that order. The sole issue for the Court’s determination was whether any question of law arose from an order that could properly be characterized as having been made by the Appellate Tribunal under sub-section (4) of section 33. If the Court found that no such order existed, the Tribunal would lack jurisdiction under sub-section (1) of section 66. Thus, the Court needed to examine the factual record to ascertain whether the Tribunal had indeed issued an order falling within the meaning of section 33(4). Consequently, when an application under sub-section (1) is not well-founded because no order exists that can be described as made under section 33(4), the Tribunal’s refusal to state a case on the ground that no question of law arises is ineffective. In such circumstances, the High Court cannot, under sub-section (2), command the Tribunal to state a case.

The Court observed that, under section 66, the High Court could not be called upon to refer a case to the Appellate Tribunal, and likewise the High Court did not possess jurisdiction under sub-section (2) of that provision to direct the Tribunal to make such a reference. The learned Attorney General had at one point suggested that the matter should first be sent to the High Court for its determination of the issue, but the Court noted that the question involved the construction of statutory provisions and therefore constituted a pure question of law. Consequently, the Court held that it would be more efficient to resolve the point directly in the present appeal, and there was no dispute that the Court had the authority, while hearing this appeal, to decide the legal question.

The Court then recalled that on 19 November 1945 the Appellate Assistant Commissioner declined to admit an appeal. The assessee, rather than filing a proper appeal, submitted a miscellaneous application before the Appellate Tribunal. The Court pointed out that the Income-Tax Act contained no provision authorising such an application. In the Tribunal’s own statement of the case, it was acknowledged that the Tribunal entertained the application and corrected the error of the Income-Tax Officer by relying on what it considered to be its inherent powers. Since there was no appeal contemplated under section 33(1) and the order was issued on the basis of purported inherent jurisdiction, the Court held that the order could not be characterised as an order made under section 33(4). Accordingly, in the absence of any order under section 33(4), there could be no reference permissible under either sub-section (1) or sub-section (2) of section 66, and therefore the appellate Court was justified in refusing to entertain the application.

Rejecting the Attorney General’s request that the Court adopt a broader interpretation, the Court noted that the learned Attorney General urged that the miscellaneous application should be treated as an appeal under section 33. The Court examined the language of section 33 and explained that any assessee who objects to an order of an Appellate Assistant Commissioner issued under section 28 or section 31 may appeal to the Appellate Tribunal within the period prescribed by sub-section (1), a period which may be extended by the Tribunal under sub-section (2A). Under sub-section (4) the Tribunal is empowered, after hearing both parties, to pass any order it deems appropriate. The Court emphasized that the Tribunal’s power to pass an order under section 33(4) arises only in the context of an appeal from an order made by the Appellate Assistant Commissioner under section 28 or section 31. Hence, if no such order by the Assistant Commissioner exists, there can be no appeal under section 33(1) and consequently no order under section 33(4). The Court further observed that section 28 was not relevant to the present issue.

The Court then turned to section 30, which governs the filing of appeals against assessments made under the Act. Sub-section (1) of section 30 delineates the various decisions against which an appeal may lie, sub-section (2) prescribes the time limit for filing such an appeal, and sub-section (3) specifies the form in which the appeal must be made. These provisions, the Court explained, form the necessary backdrop for understanding the jurisdictional limits of the Appellate Tribunal and the High Court in the present dispute.

Section 31 authorised the Appellate Assistant Commissioner to hear and dispose of appeals that arose under section 30. In particular, sub-section (3) of section 31 gave the Commissioner the power, while disposing of an appeal brought under section 30, to make an order that corresponded to any of the several clauses contained in that sub-section. Consequently, for the Commissioner to exercise his jurisdiction under section 31 and to issue an order, there must first exist an appeal that falls within the scope of section 30. The Attorney General relied only on the opening words of sub-section (1) of section 30 and argued that the appeal presented to the Appellate Assistant Commissioner concerned the amount of income that had been assessed under either section 23 or section 27. It is necessary to recall that the Appellate Tribunal had earlier decided that the two sums claimed by the assessee should be allowed to him and it had expressed its view that the appeal was partly allowed. Under section 33(4) the Tribunal possessed a very wide power; when a proper appeal was before it, the Tribunal could make any order it thought appropriate. Accordingly, the order dated 20 August 1943, issued by the Appellate Tribunal, had to be understood as a directive to the Income-Tax Officer to implement the Tribunal’s directions by allowing the two deductions that were in dispute. When the matter returned to the Income-Tax Officer, his sole function was to give effect to the Tribunal’s order; he could not reopen the assessment that he had previously made under section 23. Because the Officer was acting solely on the Tribunal’s directive on 26 September 1945, his action could not be characterised as being taken under section 23 or section 27 of the Act. Consequently, no appeal arose from the Officer’s order under section 30(1) of the Act. This meant that there was no proper appeal before the Appellate Assistant Commissioner as contemplated by section 30(1). Therefore the order issued by the Appellate Assistant Commissioner could not be regarded as one made under section 31(3), since an order under that provision can be passed only when disposing of an appeal that has been correctly filed under section 30. As a result, there was no further appeal available to the Appellate Tribunal under section 33(1), and thus the Tribunal could not make an order under sub-section (4) of that section. In the absence of any order that could be said to have been validly made under section 33(4), no question of law arose from such an order, and consequently there was no valid reference that could be made under section 66, sub-section (1) or sub-section (2). If the reference was therefore incompetent because of lack of jurisdiction under either section 66(1) or section 66(2), it could not be entertained.

In this case the Court noted that the High Court was fully justified in refusing to consider the matter, as it had done. Even if the order dated 26 September 1945, issued by the Income-tax Officer after the file returned to him for implementation of the Appellate Tribunal’s decisions, were treated as an order made under section 23 or section 27 and therefore appealable under section 30(1), the subsequent order of the Appellate Assistant Commissioner dated 19 November 1945, which declined to admit the appeal, clearly amounted to a refusal to exercise the jurisdiction that the law had vested in him. An order founded on such an error of jurisdiction could possibly be corrected by appropriate proceedings, but it could not be regarded as an order contemplated by any subsection of section 31. Because this order did not fall within the scope of section 28 or section 31, there was no right of appeal from it to the Appellate Tribunal under section 33(1). Consequently, without a proper appeal before the Tribunal, the Tribunal could not validly make an order under section 33(4). In the absence of an order under section 33(4), no reference could be made under section 66(1) or section 66(2). Accordingly, the Court held that the Appellate Tribunal’s correction of the Income-tax Officer’s order directing that the sum of Rs 13,541 should be excluded from the assessment could not be treated as an order passed under section 33(4), and therefore the operation of section 66 did not apply.

The learned Attorney-General contended that, once section 66(2) of the Act directed the Appellate Tribunal to state a case, the High Court could not subsequently refuse to answer the question referred to it. The Court observed that it need not resolve whether the High Court was precluded from refusing to answer, because even assuming that it was, the present Court could still examine the competence of the reference. As a result, the Court dismissed the appeals and ordered costs. The appeals were dismissed, and the agents for the appellant and the respondent were recorded as G H Rajadhyaksha and M S K Aiyangar respectively.