Commissioner of Income-Tax, Bombay vs Ranchhoddas Karsondas, Bombay

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 281 of 1955

Decision Date: 08/05/1959

Coram: M. Hidayatullah, Natwarlal H. Bhagwati

In this matter, the Commissioner of Income-Tax, Bombay filed a petition against Ranchhoddas Karsondas of Bombay. The judgment was delivered on 8 May 1959 by a bench consisting of Justice M. Hidayatullah, Justice Natwarlal H. Bhagwati, Justice M. Das, and Chief Justice Sudhi Ranjan. The case is reported in the 1959 AIR 1154 and the 1960 SCR (1) 114. The central issue concerned whether a voluntary return that showed income below the minimum taxable level constituted a valid return, whether the Income-Tax Officer could disregard such a return and issue a notice under section 34(1) of the Indian Income-Tax Act, 1922, and whether an assessment made within one year of that notice but beyond four years from the end of the assessment year was valid under sections 22 and 34 of the same Act.

The factual background began with a public notice issued under section 22(1) of the 1922 Act on 1 May 1945, which required every person whose total income exceeded the maximum amount not chargeable to tax to file returns for the assessment year 1945-46. On 5 January 1950, the assessee submitted a voluntary return indicating an income of Rs. 1,935 for that assessment year and added a footnote stating that his wife had sold old ornaments and that a sum of Rs. 59,026 had been deposited with the Assar Syndicate, in which the assessee was a partner. While examining the accounts of the Assar Syndicate, the Income-Tax Officer discovered the deposit of Rs. 59,026, chose to ignore the voluntary return, and on 27 February 1950 issued a notice under section 34(1) demanding that the assessee submit a return. The assessee complied on 14 March 1950 by filing an identical return. The officer then made the assessment on 26 February 1951, incorporating the Rs. 59,026 into the assessee’s total income. The assessee argued that the assessment was invalid because it was completed more than four years after the end of the assessment year, contravening section 34(1)(b). The Commissioner contended that the voluntary return was not a return at all because it disclosed no taxable income and that the assessment was valid under the proviso to section 34(3) since it was made within one year of the notice. The Court held that the assessment was invalid. It ruled that the voluntary return, although it disclosed no taxable income, was a valid return and could not be ignored; consequently, there was no question of income escaping assessment under section 34(1), and the officer was not justified in issuing the notice. The proviso to section 34(3) applied only when a proper notice under section 34(1) had been issued, which was not the case here. Because the assessment was made beyond four years after the end of the assessment year 1945-46, it was time-barred. The Court cited the earlier decision in Harakchand Makanji & Co. v. Commissioner of Income-Tax (1948) 16 I.T.R. 119 in support of its conclusion.

The Court noted the authority of India Groundnut Syndicate Ltd. v. Commissioner of Income-tax (1953) 25 I.T.R. 115 and P. S. Rama Iyer v. Commissioner of Income-tax (1957) 33 I.T.R. 458, both of which were approved. It also recorded that Commissioner of Agricultural Income-tax v. Sultan Ali Gharami (1951) 20 I.T.R. 432, B. K. Das & Co. v. Commissioner of Income-tax (1956) 30 I.T.R. 439 and Commissioner of Income-tax v. Govindlal Dutta (1957) 33 I.T.R. 630 were disapproved. The judgment was rendered in the civil appellate jurisdiction as Civil Appeal No. 281 of 1955, arising from the judgment and order dated 18 March 1954 of the Bombay High Court in Income-tax Reference No. 35 of 1953. Counsel for the appellant and counsel for the respondent were admitted, and the decision was delivered on 8 May 1959. The Court explained that the appeal, filed on a certificate of fitness granted by the High Court of Judicature at Bombay, was instituted by the Commissioner of Income-tax, Bombay against Ranchhoddas Karsondas of Bombay, who was designated as the assessee, under section 66A of the Indian Income-tax Act. The factual background was then set out. For the assessment year 1945-46, a public notice issued under section 22(1) of the Act was published on or about 1 May 1945, requiring every person whose total income during the previous year exceeded the maximum amount not chargeable to tax to furnish a return of income in the prescribed form within a period of not less than sixty days as specified in the notice. The assessee failed to file any return in response to that notice. While examining the books of a partnership named “Assar Syndicate,” in which the assessee was a partner, the Income-tax Officer discovered that in the account year corresponding to the assessment year 1945-46 six cash credits totalling Rs 59,026 had been credited in the name of the assessee’s wife. Before the Officer could take any action, the assessee submitted a voluntary return on 5 January 1950 covering the accounting year 1944-45 (assessment year 1945-46) and declaring a total net income of Rs 1,935. The return contained a footnote stating, “My wife has sold her old ornaments and deposited the sum of Rs 59,026 in the firm of Assar Syndicate in which I am a partner.” The Income-tax Officer did not act upon this return, but on 27 February 1950 issued a notice purportedly under section 34 of the Act requiring the assessee to submit his return. The notice was served on 3 March 1950, and the assessee responded on 14 March 1950 by filing a similar return showing the same income and the same explanatory footnote. Subsequently, the Income-tax Officer issued notices under sections 22(4) and 23(2) of the Act commanding the assessee to produce his books of account and to tender any evidence he wished to lead.

The Income-tax Officer had earlier required the assessee to produce his books of account and to tender any evidence he wished to lead. The record showed that the assessee complied with these notices, furnishing the demanded accounts and evidence as required. Nonetheless, on 26 February 1951 the Officer incorporated the sum of Rs 59,026 into the assessee’s total income and made an assessment for the year 1945-46 based on that inclusion. Dissatisfied with this assessment, the assessee filed appeals before the Appellate Assistant Commissioner and subsequently before the Income-tax Appellate Tribunal. He argued that the amount of Rs 59,026 could not and should not have been included in his income. He further contended that the amended provision of section 34 of the Act possessed no retrospective effect. Finally, he maintained that the assessment dated 26 February 1951 was invalid, being made four years after the end of the assessment year to which it related. Both the Appellate Assistant Commissioner and the Tribunal dismissed these contentions, finding against the assessee. However, the Tribunal, on the assessee’s request, raised two points of law under section 66(1) of the Act and referred them to the High Court of Judicature at Bombay for determination. The first question asked whether the notice issued under section 34 on 27 February 1950, after the assessee had filed a voluntary return, was valid in law. The second question asked whether the assessment made on 26 February 1951 was valid in law. The High Court heard the reference on 18 March 1954, and by a judgment delivered the same day, Chief Justice Chagla and Justice Tendolkar answered both questions in the negative. Before the High Court, the assessee reiterated his contention that, having submitted a return under section 22(3) on 5 January 1950, any assessment, if required, had to be completed before 31 March 1950 as mandated by section 34(3). He also argued that section 22(3) authorised him to make a voluntary return on the date he chose, and that the existence of such a return precluded the Authority from issuing a notice under section 34. The High Court accepted these submissions, holding that the department should have issued a notice under section 22(2) within the assessment year, and that if no return were filed within the period fixed by that notice, the department should have proceeded to a best-judgment assessment under section 23(4). The Court further observed that the alternative of issuing a notice under section 34 was permissible only when the period for a notice under section 22(2) had expired, and that such a notice could not be issued after the assessee had already filed a return. Consequently, the benefit of the one-year extended limitation period provided in the first proviso to sub-section (3) of section 34, which runs from the service of the notice, could not be claimed in this case. Having reached these conclusions, the High Court granted a certificate of fitness and allowed the appeal.

In this appeal, every argument that had been presented before the High Court was again raised by the parties before this Court. The Revenue Department added the submission that, because the assessee had concealed his income or supplied false particulars, the period within which action under section 34 could be taken was the extended period of eight years. During the hearing, the Court noted a clear divergence of opinion between the Bombay High Court and the Calcutta High Court. The Bombay High Court regarded a voluntary return that disclosed a nontaxable income as a valid return for all purposes under the Act. By contrast, the Calcutta High Court held that section 22(1) requires a return of taxable income and not a return that merely shows a loss or an amount below the taxable threshold. At one stage the Calcutta High Court had even suggested that such a return was not a return at all; subsequently it explained that the return was ineffective for the purposes of section 22(1) although it complied with the prescribed form. The Bombay High Court also expressed the view that assessment proceedings commence only with the issue of a public notice and that section 34 cannot be invoked when a return, whether it reflects taxable income or not, is filed in answer to that notice. The Calcutta High Court, on the other hand, maintained that assessment proceedings may begin either with a notice under section 22(2) or with the filing of a return that shows taxable income. The present Court clarified that it was not concerned with the amount of tax assessed but solely with the legality of the assessment process. A subsidiary issue mentioned was whether, as a matter of fact, the cash credits recorded in the wife’s name represented the income, should the husband not survive for decision.

The central question before the Court was whether the notice issued under section 34 of the Act on 27 February 1950, which was served after the assessee had filed his voluntary return on 5 January 1950, and the subsequent assessment, were valid under law. Section 34(3) of the Act provides that, except for the assessment covered by element (a) of subsection (1) or an assessment under section 23 to which element (c) of subsection (1) of section 28 applies, no assessment may be made after the expiry of four years from the end of the year in which the income, profits or gains first became assessable. However, a proviso to this provision permits an additional period of one year from the date on which the notice is served for the completion of the assessment. The proviso states, in the relevant portion, that where a notice under subsection (1) has been issued within the time prescribed, the assessment or reassessment made pursuant to that notice may be completed before the expiry of the one-year period, even if that period extends beyond the normal four-year limitation. The Court therefore needed to determine whether the notice of 27 February 1950 was issued within the time limit prescribed by section 34(1), because only then could the extra one-year period be invoked to validate the assessment.

It was explained that the provision allowing an extra period of one year from the date the notice was served could be applied only when a notice under sub-section (1) of section 34 had been issued within the time prescribed by that subsection. The Court then turned to the wording of section 34(1). Ignoring the portions that were not relevant, the provision stated that if the Income-tax Officer had reason to believe that, because of an omission or failure by an assessee to file a return of income under section 22 for any year, or, alternatively, even if no such omission existed, the Officer possessed information suggesting that income, profits or gains liable to tax had escaped assessment for any year, then the Officer could, in cases falling under clause (a), serve a notice at any time within eight years after the end of that year, and in cases falling under clause (b), serve a notice at any time within four years after the end of that year, and could proceed to assess the income. From this language the Court inferred that if the return filed on 5 January 1950 was indeed a proper return of income, there was no omission or failure by the assessee that would bring the case within clause (a) of section 34(1). Consequently, subsection (3) of section 34 would apply, limiting the assessment period to four years. Under that limitation the assessment should have been completed on or before 31 March 1950. However, the Court stated that if the filing on that date was not a return at all, then the conditions of the first subsection of section 34 would be satisfied, and the assessment could be completed within one year from the date the notice was served, which was 3 March 1950, meaning the assessment could be completed on or before 2 March 1951. In that situation the assessment would be regarded as valid. The Court emphasized that the validity of the return was intertwined with the validity of the notice, and each depended on the other. The Court then quoted section 22 of the Act, omitting irrelevant parts, which required the Income-tax Officer, on or before the first day of May each year, to give notice—by publication in the press—requiring every person whose total income during the previous year exceeded the maximum amount not chargeable to tax to furnish, within a period of not less than sixty days, a return setting forth his total income and total worldwide income for that year. The provision further allowed the Officer, when he considered a person’s total income sufficient to render that person liable to tax, to serve a notice requiring the person to furnish a return within a prescribed period.

Section 22(3) of the Income-tax Act provides that if any person fails to file a return within the period prescribed by sub-section (1) or sub-section (2), or if a return filed under either of those sub-sections contains an omission or a false statement, the person may file a return or a revised return at any time before the assessment is made. From this provision, the Bombay High Court correctly observed that sub-sections (1) and (2) set a specific time limit for filing a return, and the failure to comply occurs once that period expires. However, sub-section (3) creates a “locus poenitentiae,” allowing the taxpayer to correct a return before the assessment is finally entered. In the present matter there is no dispute that a return could be filed, albeit after the statutory deadline. The controversy therefore turns on the character of the return that was eventually filed. When the return was submitted, it disclosed an income that was below the maximum amount not liable to tax. The question that arose was whether, in such circumstances, the Income-tax Officer was barred from issuing a notice under section 34 of the Act. Historically, the Bombay and Calcutta High Courts have taken opposite positions on this point. The leading decisions of the Bombay High Court include Harakchand Makanji & Co. v. Commissioner of Income-tax (1), All India Groundnut Syndicate Ltd. v. Commissioner of Income-tax (2) and the decision now under appeal. The Calcutta High Court’s view is reflected in Commissioner of Agricultural Income-tax v. Sultan Ali Gharami (3), R. K. Das & Co. v. Commissioner of Income-tax (4) and Commissioner of Income-tax v. Govindlal Dutta (5). The Madras High Court, in P. S. Rama Iyer v. Commissioner of Income-tax (6), adopted the Bombay position. A detailed exposition of each of these authorities would not serve any useful purpose, as in several of them the point at issue was not even required to be decided. Consequently, the Court will set out in brief the two rival approaches and the bases upon which they rest, beginning with the Calcutta judgments.

In the Calcutta case of Sultan Ali Gharami (3), the tribunal first issued a notice under section 24(1) of the Bengal Agricultural Income-tax Act, which corresponds to section 22(1) of the principal Act, and the taxpayer did not file a return. Three years later a notice was served under section 24(2) of the same Act, analogous to section 22(2), and the taxpayer filed a return that showed income below the taxable minimum. The contention advanced by the taxpayer was that, absent a notice under section 24(2) within the relevant assessment year, or a notice under section 38(1) (corresponding to section 34(1) of the principal Act), any best-judgment assessment made would be invalid. The taxpayer further argued that the return could be treated as having been filed under section 24(1) or section 24(3). The learned judges, Chakravarti, and Das Gupta, J., held that a person who had

In the earlier decision, the Court observed that a person who had no assessable income was not placed under any duty to file a return. Consequently, a return that was filed either under section 24(1) or under section 24(3) but that failed to show any assessable income could not be regarded as a return under section 24(1) or even as a return under section 24(3) when it was filed in answer to a notice issued under section 24(2). The Court further explained this point at page 442, stating: “A return under section 24(1) is a return filed by a person who decides for himself that he had an assessable income in the previous year and by filing (1) (1948) 16 1. T. R. 119, (4) (1056) 30 I. T. R. 439 (2) (1954) 25 1. T. R. R (5) (1957) 33 1. T. R. 630 (3) (1951) 20 I. T R. 432(6) (1957) 32 I. T. R. 458 the return he offers that income for assessment. A person who had no assessable income in the previous year is placed under no duty by a notice under section 24(1) to furnish a return and a person who thinks, rightly or wrongly, that he had no assessable income will furnish none. A return under section 24(1), whether filed within the time allowed under the section or filed subsequently under the provisions of section 24(3), will therefore show an assessable income… A return which showed no assessable income could not possibly be ‘treated’ as a return filed under section 24(1) or a return called for under that section but filed under section 24(3), when in fact it was filed in response to a notice under section 24(2).” The Court therefore concluded that a return lacking assessable income could not be treated as a return under the statutory provisions that required an assessable income to be reported.

The opinion expressed in the earlier case was later criticised in the judgment that was under appeal. In the subsequent case of R. K. Das & Co v. Commissioner of Income-Tax, the Calcutta High Court, constituted by the Chief Justice and another Judge, clarified the true meaning of the statutory provisions. The Court noted that it was unnecessary to refer to the factual background of that case. At page 449, the Chief Justice observed: “It should be remembered, I observed, that the return in the present case is being sought to be treated as a return under section 24(1), belatedly filed.” He continued that a return under section 24(1) would only be filed by a person who believed that he had a taxable income, and therefore a return showing an income below the taxable limit could not, on a proper construction, be regarded as a return under section 24(1). Accordingly, the return in the case then under consideration could not be treated as a return filed under section 24(3). He added that this statement was not intended to imply that even a return filed in compliance with a notice under section 22(2), if filed belatedly under section 22(3), could not be a return showing an income below the taxable limit. This explanation left the precise scope of the rule somewhat ambiguous, and the matter was revisited in the later case of Commissioner of Income-Tax v. Govindlal Dutta, where the Chief Justice and another Judge again examined the true import of the law.

The Court referred to the decisions in Commissioner of Income-Tax v. Govindlal Dutta, reported in (1956) 30 I.T.R. 439 and (1957) 33 I.T.R. 630, to explain the true import of the statutory provisions. The judges examined section 22(1) of the Income-Tax Act as it existed before the 1953 amendment and observed that, under that clause, a person was required to file a return only when his total income for the preceding year exceeded the maximum amount that was exempt from tax. Consequently, the return contemplated by the statute was a return of taxable income, not a return of loss, and certainly not a return of income below the taxable threshold. The Court emphasized that a person who suffered a loss had neither a duty nor a right to file a voluntary return merely to report that loss. The learned judges concluded that it was a complete error to assume that section 22(3) allowed the filing of a voluntary return showing a loss at any time before assessment. They held that section 22(3) also contemplated the filing of a return of taxable income, and that a return not showing such income did not constitute a return at all under the law.

The judgment explained that the “Calcutta view” rested on the wording of section 22(1), which required only persons whose income exceeded the taxable limit to make a return. A person with no such income, the Court noted, need not make a return, and if he nevertheless did, that document was not a return in the legal sense. The Court found it difficult to understand how the existence of a return could be ignored once it had been filed. It observed that a return showing income below the taxable limit could be made even in response to a notice under section 22(2). The notice under section 22(1) required, in a general way, what a notice under section 22(2) required of an individual. Therefore, if a return of income below the taxable limit was a valid return in answer to a notice under section 22(2), there was no reason to consider a similar return filed in response to a public notice as not a return at all. The Court held that this conclusion did not follow from the words of section 22(1). While that subsection mandated a return only from persons whose income was above the exempted limit, a person might legitimately believe himself entitled to certain deductions and allowances and file a return as a precaution. He could disclose his income together with the deductions and allowances he claimed, and on proper assessment his income might be found to exceed the exemption limit. The Court acknowledged that it was futile for a person not liable to tax to rush in with a return, but stressed that a return in law was not a mere scrap of paper; it was a document in which the assessee represented his true income. The Court was, and said this with due respect, unable to accept the view expressed in the Calcutta decisions.

With due respect the Court could not accept the position that was set out in the Calcutta decisions. The contrary standpoint had been articulated by the Bombay High Court in the earlier case of Harakchand Makanji and Co. v. Commissioner of Income-tax (1) and had also been adopted in the judgment that was under appeal. That view received support from the Madras High Court in P. S. Rama Iyer v. Commissioner of Income-tax (2) and, in the present opinion of this Court, appears to be the more convincing of the two alternatives. In the earlier Bombay case, Chief Justice Chagla and Justice Tendolkar, as recorded in the headnote, observed that a notice issued under section 34 was required only when, at the close of the assessment year, the assessee had not filed any return and the authorities wished to proceed under section 22(2). They added that where the assessee voluntarily opted to file a return, no question of an assessment escaping could arise, and consequently there was no need to serve any notice under section 34. This principle reflects the law that applies to the facts as they are found in the present matter. During the relevant assessment year the assessee did not file a return of income, nor was any notice issued under section 22(2). Nevertheless a general notice under section 22(1) had been issued. The assessee was therefore able to lodge a return in response to that notice under section 22(3) before the assessment was made, and no time limit applied to such a return. The return was filed on 5 January 1950. Nothing prevented the Income-Tax Officer from taking up that return and proceeding to assess the assessee’s income. If the officer, on reasonable grounds, regarded the amount shown in the footnote as the true income of the assessee, an assessable income would have been identified and tax could have been imposed accordingly. Had the officer acted upon the return and entered assessment before 31 March 1950, the assessment would have been valid. Instead, the officer disregarded the return and issued a notice under section 34(1). That notice was improper because, with a return already filed, there was neither an omission nor a failure on the part of the assessee, and no issue of an assessment escaping existed. Accordingly, the notice under section 34(1) was invalid, and the assessment that followed it was likewise invalid. The Court therefore concurred with the decision under appeal. Before concluding, the Court noted two additional arguments that had been raised. The first, raised by counsel, suggested that an assessee could file a voluntary return on the final day showing income below the taxable threshold, thereby compelling the Department to complete assessment within a few hours or lose the opportunity to issue a section 34(1) notice. The Court regarded this convenience-based argument as not decisive. The Income-Tax Officer could have avoided the situation by issuing a notice under section 23(2) instead of remaining inactive until the deadline approached. The second argument contended that the return was not a genuine return and fell within clause (c) of sub-section (1) of section 28, which would extend the period for action to eight years. The Court observed that this claim had never formed part of the Department’s case at any earlier stage and therefore could not be introduced now. In the Court’s view, the reasoning of the Bombay High Court was correct in all the circumstances, leading to the dismissal of the appeal with costs.

In addressing the submissions, the Court observed that the Income-Tax Officer could have issued a notice under section 23(2) instead of remaining inactive until the limitation period was about to expire. The Court further noted that every statute of limitation inevitably creates some inconvenience and difficult situations, and that the proper remedy for such inconvenience lay with the legislature, which could amend the law appropriately. The Court emphasized that courts are bound to apply statutes as they are written and are not required to devise clever ways to defeat the operation of a limitation provision. Consequently, the argument that the limitation period should be set aside did not answer the clear meaning and implications of the Act.

The Court then turned to the second argument, which contended that the return filed was not a genuine return and therefore fell within the mischief of clause (c) of sub-section (1) of section 28. The argument further claimed that, on that basis, the period during which the tax authority could take action should be the extended period of eight years. The Court rejected this line of reasoning, stating that the issue of the return’s authenticity had never been raised as part of the Department’s case at any earlier stage and therefore could not be introduced for the first time at this stage of the proceedings.

After considering all submissions, the Court concluded that the answers rendered by the High Court of Bombay were correct in all the circumstances of this case. Accordingly, the appeal was dismissed with costs, and the order of the High Court was affirmed.