Maharaj Kumar Kamal Singh vs The Commissioner Of Income-Tax, Bihar and Orissa

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 297 of 1955

Decision Date: 01/10/1958

Coram: P.B. Gajendragadkar, A.K. Sarkar

In this matter the Supreme Court of India rendered its judgment on the first day of October in the year 1958. The case was styled Maharaj Kumar Kamal Singh versus the Commissioner of Income-Tax for Bihar and Orissa. The opinion was authored by Justice P. B. Gajendragadkar, who sat on a bench that also included Justice A. K. Sarkar, Justice A. I. Yyar, and Justice T. L. Venkatarama Sarkar. The formal citation of the decision appears in the All India Reporter as 1959 AIR 257 and in the Supreme Court Reporter Supplement as 1959 SCR Supl. (1) 10, with further citator references indicating its later discussion in several subsequent reports. The subject matter of the appeal concerned the re-assessment of income tax under the provisions of the Indian Income-Tax Act of 1922, as amended by Act 48 of 1948, specifically section 34(1)(b), which deals with the reopening of assessments when information arises that a portion of income has escaped assessment. The appellate record noted that the Income-Tax Officer, at an earlier stage, had excluded from the appellant’s tax liability the interest accrued on arrears of rent received, relying on a decision of the Patna High Court in the case of Kamakshya Narain Singh v. Commissioner of Income-Tax, reported in 1946 T.R. 673, which held that such interest was not taxable. While that decision was under appeal before the Privy Council by the Revenue, the Privy Council on 6 July 1948 ultimately reversed the High Court’s view, holding that interest on arrears of rent arising from agricultural land does not constitute agricultural income because it is neither rent nor revenue derived from the land.

The Revenue, acting on the basis of the Privy Council’s later ruling, invoked section 34 of the Income-Tax Act to reopen the assessment and to add the previously excluded interest to the appellant’s taxable income, contending that the Privy Council’s decision constituted “information” within the meaning of clause 34(1)(b) and that it gave reason to believe that a part of the assessee’s income had escaped assessment. The appellant argued that the term “information” in the statute should be limited to factual data and therefore could not encompass a judicial pronouncement on a point of law. He further submitted that once a return has been filed and a final assessment order issued, the notion that any income “has escaped assessment” cannot be invoked under the same provision. The Court held that the word “information” in section 34(1)(b) is broad enough to include knowledge of the correct state of the law, thereby covering relevant judicial decisions. Moreover, the Court clarified that the expression “has escaped assessment” is not confined to situations where no return has been filed; it also applies where a return has been filed but the assessing officer has, by mistake, failed to tax a portion of income that was indeed assessable. Consequently, the Court affirmed that the Revenue was entitled to reopen the assessment under the statutory provision.

The provision under discussion applied not only to situations in which no return had been filed by the assessee, but also to cases where a return had indeed been filed and the Income-tax Officer, by mistake, failed to tax a portion of the income that was assessable. The Court observed that the section covered instances where income escaped assessment because of inadvertence, oversight, or the non-filing of a return, and it likewise extended to errors on the part of the tax officer after a return was submitted. In arriving at this conclusion, the Court distinguished the decisions in Rajendra Nath Mukherjee v. Income-tax Commissioner, reported in 1933 L.R. 61 I.A. 10, and Messrs. Chatturam Horliram Ltd. v. Commissioner of Income-tax, Bihar and Orissa, reported in [1955] 2 S.C.R. 290. Conversely, it approved the authorities in Raja Benoy Kumar Sahas Roy v. Commissioner of Income-tax, West Bengal, [1953] 24 I.T.R. 70; Madan Lal v. Commissioner of Income-tax, Punjab, [1944] 12 I.T.R. 8; and The Commissioner of Income-tax v. Raja of Parlakimedi, (1926) I.L.R. 49 Mad. 22. The Court, however, disapproved the earlier decision of Maharaja Bikram Kishore of Tripura v. Province of Assam, reported in [1949] 17 I.T.R. 220. The judgment concerned Civil Appeal No. 297 of 1955, which was filed against the decree dated 7 April 1954 of the Patna High Court in Miscellaneous Judicial Case No. 327 of 1951. Counsel for the appellant comprised A. V. Viswanatha Sastri and B. K. Sinha, while counsel for the respondent were K. N. Rajagopala Sastri, R. H. Dhebar and D. Gupta. The appeal was decided on 1 October 1958, and the opinion was delivered by Justice Gajendragadkar. The matter arose from a certificate issued by the Patna High Court under section 66A(2) of the Income-tax Act, which raised a narrow question regarding the construction of section 34(1)(b) of that Act. The factual background involved proceedings initiated by the Income-tax Officer, Special Circle, Patna, against Maharaja Bahadur Rama Rajaya Prasad Singh—who was the father of the appellant—seeking to levy tax for the assessment year 1945-46. By the assessment order, the total income chargeable to tax was fixed at Rs. 1,60,602, a figure that included Rs. 93,604 received by the assessee as interest on arrears of rent after deduction of collection charges. The assessee contended before the Income-tax Officer that this amount should not be taxed, relying on the Patna High Court’s decision in Kamakshya Narain Singh v. Commissioner of Income Tax (1946) I.T.R. 673. The Officer, however, held that because the tax department had obtained leave to appeal that decision to the Privy Council, the issue was sub judice, and therefore it would be improper to accept the assessee’s claim. Consequently, the officer incorporated the Rs. 93,604 in the total income for assessment but ordered that the recovery of tax on that amount be stayed until the Privy Council’s decision was pronounced or until 31 March 1947, whichever occurred first. This stay order was issued under section 23(3) of the Act on 31 December 1945. The assessee challenged this order by filing an appeal before the Appellate Assistant Commissioner of Income-tax, Patna. On 8 May 1946, the appellate authority held that the Income-tax Officer was bound by the earlier judicial decision and set aside the order concerning the Rs. 93,604, directing the Officer to make a fresh assessment.

In the appeal, the appellate authority ruled that the decision in the case of Kamakshya Narain Singh (supra) (1) must be applied, and consequently set aside the order that was being challenged with respect to the sum of Rs. 93,604. The authority directed the Income-tax Officer to carry out a fresh assessment of the taxpayer’s income. In addition, the appellate authority noted that the record did not clearly identify how much of the amount of Rs. 93,604 represented interest on arrears of agricultural rent and how much represented interest on arrears of non-agricultural rent. Accordingly, the Income-tax Officer was instructed to ascertain the portion that related to non-agricultural rent and to levy tax on that portion. Acting under this appellate direction, the Income-tax Officer issued a new assessment on 20 August 1946, invoking sections 23(3) and 31 of the Income-Tax Act. By that assessment the total taxable income was computed after deducting the entire amount of Rs. 93,604, and a few further minor reductions were permitted in order to conform with the appellate order. The tax department did not contest either the appellate order or the subsequent assessment made by the Income-tax Officer in accordance with that order.

Subsequently, on 6 July 1948, the department’s appeal to the Privy Council against the Patna High Court’s judgment in Kamakshya Narain Singh’s case (1) was allowed. The Privy Council held that interest on arrears of rent payable on agricultural land does not constitute agricultural income, because such interest is neither rent nor revenue derived from the land. Following that decision, the Income-tax Officer served a notice to the assessee under section 34 of the Act on 25 September 1948, requiring the assessee to file a fresh return on the basis that the officer had reason to believe that a portion of the assessee’s income for the year ending 31 March 1946 had escaped assessment. That notice was later found to be defective, and under the amended provisions of section 34 a corrected notice was issued on 18 March 1949. The actions taken under section 34 eventually resulted in a revised assessment order issued under sections 23(3) and 34, wherein the amount of Rs. 93,604 was added back to the assessment as interest on arrears of rent. This revised assessment was dated 30 April 1949.

The assessee appealed against the revised assessment, but the appellate authority dismissed the appeal and affirmed the assessment on 26 July 1949. The authority held that the Privy Council’s decision in Kamakshya Narain Singh (supra) (1) qualified as information within the meaning of clauses (a) and (b) of section 34(1), and that the Income-tax Officer therefore had proper reason to believe that part of the assessee’s income had escaped assessment. The assessee subsequently approached the Income-tax Appellate Tribunal. On 21 August 1950, the tribunal, citing the authorities (1) [1948] 16 I.T.R. 325, confirmed the order that had been passed by the appellate authority.

The appellate authority dismissed the assessee’s appeal and held that the provisions of section 34, as amended in 1948, applied to the case. It further observed that the decision of the Privy Council placed the matter within the scope of sub-section (1)(b) of section 34. During the pendency of these proceedings the assessee died, and the appellant succeeded to the estate of his deceased father. The appellant then filed an application under section 66(1) of the Act, requesting that the tribunal refer the question of law raised in the case to the Patna High Court for its opinion. The tribunal rejected this application on 27 February 1951. Consequently, the appellant approached the Patna High Court under section 66(2) of the Act. The High Court allowed the application and, by its order dated 15 December 1951, directed the tribunal to state the case and to refer the question of law for the Court’s opinion. In compliance with that direction, the tribunal issued an order on 23 July 1952, furnishing a statement of the case and referring to the High Court the legal question presented by the appellant. The question so framed was whether, in the circumstances of the case, the assessment order under section 34 of the Act concerning interest on arrears of rent was legal. This reference was heard by Justices V. Ramaswamy and C. P. Sinha of the Patna High Court on 7 April 1954, and the Court answered in favour of the revenue department. The appellant subsequently obtained a certificate from the Patna High Court on 13 September 1954, whereby the Court, under section 66A(2) of the Act, certified that the matter raised a substantial question of law and was suitable for appeal to this Court. Thus the present appeal has arisen before the Supreme Court.

The issue for determination is the true construction of section 34(1)(b) of the Act. Section 34 has been amended in 1939 and again in 1948, and counsel for the appellant conceded that the 1948 amendment governs the present dispute. The amended section 34(1) addresses cases where income has escaped assessment in two distinct clauses. Clause (a) deals with situations in which income has escaped assessment because the assessee omitted or failed to file a return of income under section 22; this clause is not relevant to the present case. Clause (b) provides, inter alia, that notwithstanding the absence of any omission or failure described in clause (a), if the Income-Tax Officer, on the basis of information in his possession, has reason to believe that income, profits, or gains chargeable to income tax have escaped assessment for any year, have been under-assessed, or have been assessed at too low a rate, he may, within four years of the end of that year, serve a notice containing any of the requirements that could be included in a notice under subsection (2) of section 22, and may proceed to assess, reassess, or recompute the relevant amounts as if the notice were issued under that subsection. It is clear that two conditions must be satisfied before the officer can act under section 34(1)(b): first, the officer must possess information that came into his possession after the assessment order in question; second, that information must lead him to believe that chargeable income has escaped assessment for any year.

It was explained that under clause (b) of section 34(1) the officer, if he has reason to believe—based on information in his possession—that income, profit or gain chargeable to tax has escaped assessment, has been under-assessed, has been assessed at too low a rate, has been the subject of excessive relief under the Act, or that an excessive loss or depreciation allowance has been computed, may, at any time within four years after the end of the year to which the assessment relates, serve the assessee a notice containing any of the requirements that could be included in a notice under sub-section (2) of section 22. The officer may then proceed to assess or reassess such income, profit or gain or recompute the loss or depreciation allowance, and the provisions of the Act shall, as far as possible, apply as if the notice were one issued under that sub-section. The Court observed that two conditions must be satisfied before the Income-tax Officer can act under section 34(1)(b). First, the officer must possess information, which in this context means that the relevant information must have come into his possession after the assessment order in question was made. Second, that information must lead the officer to believe that taxable income has escaped assessment for any year, or that it has been under-assessed, assessed at too low a rate, or subjected to excessive relief under the Act. In the present appeal, counsel for the appellant raised two questions under this sub-section. He argued that “relevant information” should be understood as information about facts and should not include a decision of the Privy Council on a point of law. He further contended that where income has been properly returned for assessment and an assessment order has been passed, it cannot be said that any income has escaped assessment within the meaning of section 34(1)(b). Accordingly, the appellant claimed that neither of the two conditions required by section 34(1)(b) had been satisfied and that the revised assessment order against him was therefore illegal. It was acknowledged that, according to its strict literal meaning, the word “information” may include knowledge of the state of the law or a legal decision. However, the argument was made that, in this context, the word should be given a narrower construction limited to factual material, distinct from information about the law. To support this view, counsel cited the marginal notes of sections 19A and 20A, as well as sections 22(3) and 28, arguing that the information contemplated in those provisions refers to facts or particulars and does not address the state of the law or any legal question, and therefore the term in section 34(1)(b) should be read to mean only factual information. The Court was not persuaded by these arguments. It held that even if the word “information” in other provisions of the Act denotes facts or particulars, that does not necessarily determine its meaning in section 34(1)(b). The meaning of the word must be derived from the context of the specific provision in which it appears.

The Court observed that the meaning of the word “information” would naturally depend on the context of the specific provision in which it was used. It was then argued that sections 33B and 35 gave the designated authorities sufficient power to revise the orders of the Income-tax Officer and to correct mistakes, and consequently it would be proper to interpret the word “information” in section 34(1)(b) narrowly, limiting it only to information concerning facts or particulars. The Court held that this contention was not correct. It explained that if the ordinary grammatical meaning of “information” includes both factual information and information about the state of the law, it would be unreasonable to restrict the term only to factual information merely because some assessment cases might be revised or rectified on a ground of error of law and could fall within sections 33B and 35. Moreover, the application of those two sections is itself subject to the limitations expressly prescribed in them, and therefore the existence of revision or rectification powers in those sections was not a relevant factor for construing section 34(1)(b). The Court further noted that the explanation to section 34 did not aid the appellant. While it is true that, under the explanation, the production before the Income-tax Officer of account books or other evidence from which material facts could, with due diligence, be discovered would not necessarily amount to a disclosure within the meaning of the section, the Court saw no connection between that observation and the construction of clause (b) of section 34(1). On the contrary, the Court pointed out that one of the cases expressly mentioned in section 34(1)(b) necessarily implies that the word “information” must refer to legal information. Where, because of information in his possession, the Income-tax Officer has reason to believe that income has been assessed at an unduly low rate, he is empowered to revise the assessment; and there can be no doubt that such a belief may often arise from information about the true legal position concerning the applicable rates. The Court concluded that if the word “information” in this class of cases must include information about the law, it would be impossible to accept an argument that, for other cases falling under the same provision, the same word should be given a narrower meaning. Accordingly, the Court held that the word “information” in section 34(1)(b) includes information about the true and correct state of the law and therefore covers information regarding relevant judicial decisions. In that light, the Court could not accept the argument that the Income-tax Officer was unjustified in treating the Privy Council decision at issue as “information” within section 34(1)(b). The Court also referred to the other condition prescribed by section 34.

The Court examined the meaning of the term “assessment” in section 34(1)(b) and considered the argument presented by Mr. Sastri that “assessment” should not be limited to the assessment order but should also cover every step taken in the process of levying tax. The Court agreed that the broader definition of “assessment” was correct, but observed that this broad meaning did not assist the appellant because the issue before the Court concerned the “most critical act” in the taxation process, namely the issuance of the assessment order itself. The Court then turned to the word “escaped” as defined in the Oxford English Dictionary. Mr. Sastri relied on the dictionary meaning that “escaped” means “to elude observation or search; to elude the notice of a person,” and contended that income could be said to have escaped assessment only when no return had been filed for that income. The Court rejected this narrow construction. It noted that the same dictionary also gives “escape” the meaning “to get clear away from pursuit; to succeed in avoiding anything painful or unwelcome.” Accordingly, the Court held that the dictionary meaning alone could not restrict “escaped” to situations where the assessee failed to file a return. Even after a return is filed, a portion of income may remain unassessed, and that unassessed portion can be described as having escaped assessment. The Court illustrated this point with the facts of the present case: interest on arrears of rent earned from agricultural land was brought to the Income-Tax Officer’s attention. The Officer considered whether that amount was assessable and, relying on a binding decision of the Patna High Court, concluded that the income was not liable to tax. Consequently, a part of the assessee’s income had not been assessed and, in that sense, had clearly escaped assessment. The Court further asked whether the subsequent reversal of the Patna High Court decision by the Privy Council meant that no income had escaped assessment. It found no justification for such a conclusion and rejected the notion that only inadvertence, oversight, or the failure to file a return could give rise to escaped assessment. In the Court’s view, even where a return has been filed, if the Income-Tax Officer mistakenly fails to tax a portion of assessable income, that portion has escaped assessment. Therefore, the appellant’s attempt to impose a very narrow and artificial limitation on the meaning of “has escaped assessment” under section 34(1)(b) could not be sustained.

In the present case the Court observed that even where a taxpayer has filed a return, if the Income-tax Officer mistakenly fails to levy tax on a portion of assessable income, that portion is deemed to have escaped assessment. Consequently, the appellant’s effort to impose a very narrow and artificial limitation on the meaning of “escape” in section 34(1)(b) could not be sustained. The counsel for the appellant, however, contended that a narrow construction of the expression “has escaped assessment” had been approved by the Privy Council in Rajendranath Mukherjee v. Income-tax Commissioner. He relied particularly on a passage from that judgment which stated that the requirement in section 34 to serve a notice calling for a return of income which has escaped assessment “strongly suggests that income which has already been duly returned for assessment cannot be said to have escaped assessment within the statutory meaning.” To appreciate the effect of this observation the Court noted that it was necessary to examine the material facts of the Privy Council case and the specific points raised before that apex body.

The Court then recounted the factual matrix of the Privy Council reference. In 1930 the Income-tax Officer had issued an assessment order against Burn & Co., an unregistered firm, assessing it to income-tax and super-tax for the year 1927-28 under the Act. The individual partners of Burn & Co., who later appeared as appellants before the Board, argued that the officer lacked competence to make the assessment after the expiry of 31 March 1928, the year to which the assessment related. The Commissioner of Income-tax countered this plea by pointing to other relevant facts that explained the delay in issuing the assessment. Toward the end of the financial year 1926-27 the partners of a registered firm, Martin & Co., had purchased the business and assets of Burn & Co., a transaction carried out by the partners in their personal capacities and not on behalf of Martin & Co. In April 1927 the Income-tax Officer of District I issued a notice to Burn & Co. under section 22(2) requiring a return of the total income for the year ending 31 March 1927, with a view to assessing the firm for the year 1927-28. A similar notice was issued by the Income-tax Officer of District II. When these notices were issued, both officers were unaware that the business of Burn & Co. had been acquired by the partners of Martin & Co. The transaction later came to the attention of the tax authorities; consequently the file of Burn & Co. was transferred by the officer handling District II, and in February 1928 an assessment order was issued on Martin & Co. based on the combined incomes returned by Martin & Co. and Burn & Co., on the footing that the business of Burn & Co. had become a branch of Martin & Co.

Martin & Co. filed an appeal against the assessment that had been made on its combined income with that of Burn & Co., and the High Court allowed the appeal in May 1930. The Court held that, for the purposes of the Income-Tax Act, the income of a firm that is registered cannot be aggregated with the income of a firm that is unregistered; each firm must be assessed separately even though the same persons may be interested in the profits of both entities. As a result of that decision, the assessment previously issued to Martin & Co. was amended by removing the income that had been reported by Burn & Co. Subsequently, in November 1930, a fresh assessment was issued to Burn & Co. based on the return that Burn & Co. had filed in January 1928. That November 1930 assessment became the subject of an appeal before the Privy Council.

The principal question presented to the Privy Council was whether the assessment made under section 23(1) in November 1930 for the year 1927-28 was a lawful assessment. The appellants argued that, when the Income-Tax Act is properly construed, the Income-Tax Officer is obliged to complete assessment proceedings within the relevant assessment year, and that any failure to do so leaves the authorities with only the remedy provided by section 34. The Privy Council rejected this argument, holding that neither section 23 nor any other express provision of the Act imposes a time limit on when an assessment must be made. The Council then considered the alternative argument that section 34 implied a prohibition on making an assessment after the tax year had ended. In interpreting section 34, the Council observed that the argument attempted to give the word “assessment” an unduly narrow meaning and the word “escaped” an overly broad meaning. The Council endorsed the observation of Rankin C. J. in Re Lachhiram Basantlal (1) (1030) I.L.R. 58 Cal. 909, 912, which stated that income has not escaped assessment where proceedings for assessing the assessee’s income are still pending and have not yet resulted in a final assessment. Accordingly, the Privy Council concluded that as long as assessment proceedings are ongoing and no final order imposing tax has been passed, it is premature to say that any portion of the assessee’s income has escaped assessment. Only after a final order levying tax has been issued may one say that part of the income has escaped assessment. In the result, the Lords held that because proceedings issued under section 22(2) were still pending against the appellants and no final order had been made, the assessment could not be said to be illegal.

In the proceedings that were instituted against the appellants, the Court held that it could not accept the contention that the Income-tax Officer was required to act against them for the income of the relevant year under section 34 of the Act. When the decision is examined together with the material facts and the specific argument presented before the Privy Council by the appellants, it becomes apparent that the proposition that, according to the Privy Council, section 34 should be disregarded whenever a notice under section 22(2) has been served on a taxpayer, the taxpayer has filed a return, and a final order has been issued by the Income-tax Officer in those assessment proceedings, cannot be sustained. The earlier ruling merely articulated that while assessment proceedings are pending, it is not correct to assume that any income has escaped assessment; that principle is fundamentally distinct from a blanket statement that income never escapes assessment once assessment proceedings have been commenced and a final order has been rendered. Consequently, the Court concluded that the earlier decision does not lend support to Mr Sastri’s argument that section 34 is inapplicable in the present matter. The Court also referred to the Calcutta High Court’s judgment in Lachhiram Basantlal, noting that the legal position articulated by Rankin C.J. regarding the operation of section 34 was expressly endorsed by the Privy Council in the case of Rajendra Nath Mukherjee. While addressing the assessee’s claim that the assessment order was invalid because it was passed more than one year after the close of the relevant financial year and that the Income-tax Officer might have relied on section 34, Rankin C.J. observed that income can be said to have escaped assessment only when an assessment has been made that fails to include that income. Although this remark was obiter, it aligns fully with the later pronouncement of the learned Chief Justice that received the Privy Council’s approval. Mr Sastri also cited the Supreme Court’s decision in Messrs Chatturam Horliram Ltd. v. Commissioner of Income-Tax, Bihar & Orissa to buttress his interpretation of section 34. In that case, the assessee’s tax assessment was reduced on appeal and ultimately set aside by the Income-tax Appellate Tribunal on the ground that the Indian Finance Act of 1939 was not in force during the assessment year in Chota Nagpur; the High Court, on reference, upheld the tribunal’s decision, after which the Governor of Bihar promulgated the Bihar Regulation.

Section IV of the 1942 Ordinance was enacted in order to bring the Indian Finance Act of 1939 into operation in the Chota Nagpur region with retrospective effect dating back to 30 March 1939. The Governor-General gave formal assent to this Ordinance, thereby giving it legal force. Subsequently, on 8 February 1944, the Income-Tax Officer issued an order pursuant to which proceedings were initiated against the assessee under the provisions of section 34 of the Income-Tax Act. These proceedings ultimately led to the assessment of the assessee’s income-tax liability. The assessee challenged the validity of the notice issued under section 34 in his appeal before this Court, arguing that the notice was not lawful. The Court examined the matter and concluded that the income, profits or gains that were the subject of the assessment were indeed chargeable to income-tax. Moreover, the Court held that the situation constituted an instance of chargeable income escaping assessment within the meaning of section 34, and it was not merely a case of non-assessment of income-tax.

The Court’s decision, taken as a whole, was fundamentally at odds with the argument advanced by counsel for the appellant, identified in the record as Mr Sastri. Mr Sastri relied heavily on observations made by Justice Jagannadhadas, specifically the remark that “the contention of the learned counsel for the appellant that the escapement from assessment is not to be equated to non-assessment simpliciter is not without force.” He further emphasized that the learned judge’s reasoning for the final decision was that earlier assessment proceedings had failed to produce a valid assessment because of a lacuna not attributable to the assessing authorities, despite the income being chargeable to tax. On that basis, Mr Sastri contended that section 34 should be invoked only where income escaped assessment due to a defect that was not the fault of the assessing authorities. The Court rejected this narrow construction, observing that the statements relied upon by Mr Sastri were made in the specific factual context of the case before the Court and must be read accordingly. It would be unreasonable to infer that those observations were intended to limit the application of section 34 solely to situations where the omission was caused by reasons external to the assessing authorities. Justice Jagannadhadas had himself cautioned that it was unnecessary to precisely define “escapement from assessment” and that a decision could be based on the narrow ground already referred to. Consequently, the Court found that the decision cited offered no assistance to the appellant’s case. The Court also noted that divergent interpretations of section 34 existed among the various High Courts, and therefore it was appropriate to consider other authorities, beginning with the judgment of the Full Bench of the Lahore High Court in Madan Lal v. Commissioner of Income-Tax, Punjab, where the majority held that…

The Court examined the meaning of section 34 of the Act as it stood at the relevant time and held that the provision was not confined solely to situations where income had not been returned at all. It applied also to cases where an item of income was shown in the return filed by the assessee but was left unassessed by the Income-tax Officer, or where such an item was assessed in the first instance and the assessment was later cancelled by an appellate or revisional authority. In delivering the majority judgment, Justice Din Mohammad expressed agreement with the view of Justice Coutts Trotter, Chief Justice, in The Commissioner of Income-tax v. Raja of Parlakimedi, that the expression “escaped assessment” extends even to cases where the Income-tax Officer deliberately adopted an erroneous construction of the Act as well as to cases where the officer simply omitted the assessable property from his consideration and therefore from his assessment. The next authority cited was the decision of the Bombay High Court in The Commissioner of Income-tax, Bombay v. Sir Mahomed Yusuf Ismail. In that case Chief Justice Beaumont construed the words “definite information” in section 34 and held that, in order to take action under the section, there must be some information as to a fact which leads the Income-tax Officer to discover that income has escaped assessment or has been under-assessed. He further observed that the fact may relate to the state of the law, for example that a precedent has been overruled or that a new statute has been enacted which has not been brought to the officer’s attention. Justice Chagla, delivering a concurring judgment, was inclined to hold that the term “information” in the section should be limited to information as to facts or particulars and should not include information as to law. In his opinion a mistake of law or a misunderstanding of the provisions of the law is not covered by the language of the section as amended in 1939. In reaching this conclusion he appeared to rely on the observations of Justice Rowlatt in Anderton and Halstead Ltd. v. Birrell that the word “discover” in section 125 of the English Act does not include a mere change of opinion on the same facts and figures upon the same question of accountability, being a question of opinion. It may be noted that Justice Rowlatt’s statement of the law was later overruled by the Court of Appeal in Commercial Structures Ltd. v. R. A. Briggs. Shortly after the Bombay High Court decision was reported, the same question was raised before the Madras High Court in Raghavalu Naidu & Sons v. Commissioner of Income-tax, Madras.

Leach C. J., who delivered the judgment of the Court, agreed with the construction that the Bombay High Court placed on the expression “definite information” on the ground that it was very desirable to avoid conflict on such a question. He added, however, that in view of the opening words of the section as it was amended in 1939, the word “discovers” meant something more than “has reason to believe” or “satisfies himself”, and consequently it would not be right to regard the English decisions on the meaning of the word “discovers” in s. 125 of the English Act as being in point. He cited the English authorities reported in (1) [1932] I. K. B. 271, (2) [1949] 117 I.T.R. Supplement 30, and (3) [1945] 13 I.T.R. 194, 197, and stated that those decisions were not controlling. He also made it clear that in following the Bombay decision the Court did not intend to imply that the definite information must relate to a pure question of fact, because it would be impossible to lay down a rule that would cover all cases in which this section could be invoked.

The Court noted that the Calcutta High Court had expressed conflicting views on this point. In Maharaja Bikram Kishore of Tripura v. Province of Assam (1), Chief Justice Harries and Justice Mukherjea dealt with the construction of s. 30 of the Assam Agricultural Income-Tax Act (Assam IX of 1939), which corresponds to s. 34 of the present Act. They held that when a certain income had been included in the assessee’s return but was not assessed on the ground that it was not assessable, that income could not be treated as having escaped assessment and therefore could not be reassessed under s. 30 of the Assam Agricultural Income-Tax Act. The learned Chief Justice, in his judgment, observed that earlier decisions of the Calcutta High Court were undoubtedly against the appellant’s contentions, but he took the view that the question had really been concluded by the decision of the Privy Council in Rajendra Nath Mukherjee’s case (supra) (2). The Privy Council decision was read by the Chief Justice as supporting the view that s. 34 would be inapplicable to cases where income had been returned, assessment proceedings had been taken, and a final order of assessment had been passed by the Income-Tax Officer against the assessee. The Court, however, reiterated that the Privy Council decision did not support that view. In contrast, in Raja Benoy Kumar Sahas Roy v. Commissioner of Income-Tax, West Bengal (1), Chief Justice Chakravartti and Justice Lahiri took the opposite view, holding that information as to the true state or meaning of the law derived freshly from an external source of authoritative character was definite information within the meaning of s. 34. It appears that, in construing the scope and effect of the provisions of s. 34, the High Courts have adopted divergent approaches, as reflected in the authorities cited: (1) [1949] 17 I.T.R. 220; (2) (1933) 61 1,A. 10, 16; and (3) [1933] 24.

The Court examined whether an Income-tax Officer could invoke section 34 on the basis that his own original assessment decision was incorrect, even though no fresh information from an external source had been obtained, and also whether a successor to that Officer could rely on section 34 to set aside an assessment made by his predecessor that was alleged to be erroneous; divergent opinions had been expressed on this precise question. Counsel for the respondent, identified as Mr Rajagopala Sastri, advanced the submission that the amendment to section 34 effected in 1948 authorised an Income-tax Officer to act under the provision even if the Officer merely altered his own view without receiving any new external information, and that such a change of mind could justify the conclusion that, in a particular case, the Officer had mistakenly allowed the assessee’s income to escape assessment. The Court expressly declined to render any opinion on the correctness of that specific contention within the present appeal. In its decision, the Court held that the Patna High Court was correct in concluding that the decision of the Privy Council fell within the meaning of “information” prescribed by section 34(1)(b), and that this Privy Council decision legitimately supported the Income-tax Officer’s belief that a portion of the appellant’s income had escaped assessment for the relevant year. Accordingly, the appeal failed and was dismissed, with the order that costs be awarded to the respondent. Appeal dismissed.