Maharajadhiraj Sir Kameshwar Singh vs The State Of Bihar

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 254 of 1954

Decision Date: 15 May 1959

Coram: M. Hidayatullah, Natwarlal H. Bhagwati

In this matter, the Supreme Court recorded that the appeal was filed by Maharajadhiraja Sir Kameshwar Singh of Darbhanga, who was designated as the assessee, seeking special leave to challenge a decision of the Patna High Court dated 19 February 1952. The High Court had answered affirmatively two questions that had been referred to it under section 25 of the Bihar Agricultural Income‑Tax Act of 1938. The first question concerned whether, in view of the particular circumstances and especially the manner in which the learned Agricultural Income‑Tax Officer had, after careful consideration, held in his initial judgment of 5 January 1946 that the assessee was not liable for the receipt arising from a zarpeshgi lease, the Officer possessed the jurisdiction to revise his own order under section 26 of the Act. The second question sought to determine, assuming that such jurisdiction existed, whether the income derived from the zarpeshgi lease should be treated as taxable under the same Act. The appeal was heard by a bench comprising Justice M. Hidayatullah and Justice Natwarlal H. Bhagwati, and the arguments were presented by counsel for both the appellant and the respondent, including the Attorney‑General for India.

The factual backdrop of the case was confined to a narrow fiscal period. For the assessment year 1944‑45, which corresponded to the year of account 1351 Fasli, the assessee reported an agricultural income of Rs 37,43,520. From this amount, the assessee claimed a deduction amounting to Rs 9,42,137‑3‑10 ½, which he said represented land revenue, rent and related charges, and specifically included a sum of Rs 2,82,192 that had been paid to the Tekari Raj. The payment to Tekari Raj was said to relate to two leasehold properties that the Tekari Raj had acquired on zarpeshgi lease by indentures dated 15 August 1931 and 31 January 1936. The assessee sought to treat this Rs 2,82,192 as a capital receipt and therefore to deduct it from his taxable agricultural income. The Agricultural Income‑Tax Officer of Darbhanga, by an order dated 28 December 1945, accepted the assessee’s contention and exempted the amount from agricultural income‑tax. In his order, the Officer observed: “Out of Rs 9,42,137‑3‑10 ½ claimed on account of Land Revenue and rent, Rs 2,82,192 is shown as payment to Tekari Raj and then taken towards the realisation of Zarpeshgi Loan to self. I have gone through the bond of Gaya Zarpeshgi Lease. This payment is allowed to the assessee, as it is a capital income according to the terms of the bond. At the same time, I think, this amount of Rs 2,82,192 should be treated as income to Tekari Raj and assessed in Gaya Circle along with other income.”

The assessment order was subsequently approved by the Assistant Commissioner of Agricultural Income‑Tax on 4 January 1946, and on the following day the Income‑Tax Officer issued a formal demand notice. The assessee complied by paying two of the three instalments that were due. However, on 22 March 1946, the Agricultural Income‑Tax Officer recorded an order stating that some agricultural income from the Gaya zarpeshgi lease, which should have been taxed for the year 1944‑45 (1351 Fasli), had escaped assessment, and consequently he issued a notice under section 26 fixing 20 May 1947 as the date for further action. After the assessee appeared before the officer, a supplementary assessment order was passed, imposing a tax of Rs 39,512‑6‑0 on a sum of Rs 2,52,879. In delivering the reasons for this supplementary assessment, the Officer explained that according to the terms of the lease the assessee was required to remain in possession of the leased lands and to enjoy the usufruct of those lands for a fixed number of years, and that the consideration received under the lease therefore constituted agricultural income which should be liable to tax under the provisions of the Act.

The assessment of the amount claimed as a deduction was approved by the Assistant Commissioner of Agricultural Income‑tax on 4 January 1946. On the following day the Income‑tax Officer entered his formal order and issued a demand notice. The taxpayer made payment of two of the three instalments that were demanded. On 22 March 1946 the Agricultural Income‑tax Officer entered an order stating that some agricultural income arising from the Gaya Zarpeshgi lease, which should have been taxed for the year 1944‑45 (1351 Fasli), had escaped assessment and that a notice should be issued under section 26, fixing the date of 20 May 1947 for such assessment. After the taxpayer appeared before the officer, a supplementary assessment was made and tax of Rs 39,512‑6‑0 was levied on a taxable amount of Rs 2,52,879. In explaining his view, the Agricultural Income‑tax Officer observed that, according to the terms of the lease, the taxpayer was required to remain in possession of the leased lands and to enjoy the usufruct thereof for a fixed period, paying an annual rent of Rs 1,000 to the lessor. The officer explained that the lease granted the taxpayer the right to the lands for a specified term on a fixed rent, and that any income generated from those lands during the lease term belonged to the taxpayer. Consequently, such income should be taxed in the hands of the taxpayer and not in the hands of the lessor. The officer stated that he was acting under section 26 of the Bihar Agricultural Income‑tax Act, 1938.

The taxpayer appealed the officer’s decision. The Commissioner of Agricultural Income‑tax set aside the officer’s order, holding that the agricultural income derived from the Tekari Raj property had been returned by the taxpayer and was treated as exempt, and therefore it could not be said to have escaped assessment for the purpose of invoking section 26 of the Act. The Province of Bihar, as it was then known, moved the Board of Revenue, Bihar, which by a resolution dated 7 February 1948 referred two questions to the High Court of Patna. The Board did not express any opinion on the questions. The High Court answered both questions in favour of the State of Bihar. When leave was refused by the High Court, the taxpayer applied for and obtained special leave to appeal to this Court. Section 26 of the Bihar Agricultural Income‑tax Act, under which the officer claimed authority, is substantially the same as section 34 of the Indian Income‑tax Act as it stood before its amendment. Accordingly, the parties relied extensively on the earlier judicial interpretations of that provision. Section 26 of the Act provides that if, for any reason, any agricultural income chargeable to agricultural income‑tax has escaped assessment for any financial year, or has been assessed at too low a rate, the Agricultural Income‑tax Officer may, within one year of the end of that financial year, serve a notice on the person liable to pay tax and may proceed to assess or reassess such income, applying the tax rate that would have been applicable had the income not escaped assessment.

Section 26 of the Agricultural Income‑Tax Act provides that if, for any reason, agricultural income that is chargeable to agricultural income‑tax either escaped assessment for a particular financial year or was assessed at a rate that was too low, the Agricultural Income‑Tax Officer is empowered to act within a specified period. Specifically, the Officer may, at any time within one year after the end of the financial year in which the alleged error occurred, deliver a notice to the person who is liable to pay agricultural income‑tax on that income. In the case of a company, the notice must be served on the principal officer of the company. The notice may contain any or all of the matters that could be included in a notice issued under subsection (2) of section 17. After serving the notice, the Officer may proceed to assess or re‑assess the income in question. The Act then applies as far as possible as if the notice had been issued under the referenced subsection. However, the tax that is finally charged must be calculated at the rate that would have applied if the income had not escaped assessment or, where appropriate, if a full assessment had been made.

For the purpose of comparison, the text of section 34 of the Indian Income‑Tax Act, as it existed before its amendment in 1948, is reproduced. That provision stated that when an Income‑Tax Officer, based on definite information in his possession, discovers that income, profits, or gains chargeable to income‑tax have escaped assessment in any year, have been under‑assessed, have been assessed at an excessively low rate, or have benefited from excessive relief under the Act, the Officer may take action. If the Officer has reason to believe that the assessee deliberately concealed income details or furnished inaccurate particulars, the Officer may serve a notice within eight years of the end of the relevant year. In other circumstances, the notice may be served within four years of the year’s end. The notice is to be served on the person liable to pay tax on the income, profits, or gains, or on the principal officer of a company, and may contain any or all of the requirements that could be included in a notice under sub‑section (2) of section 22. The Officer may then assess or re‑assess the income, profits, or gains, and the provisions of the Act shall apply as if the notice had been issued under that sub‑section. The tax charged must be at the rate that would have applied had the income, profits, or gains not escaped assessment or full assessment, as the situation demands.

The central question that arose in the present dispute was whether income that had been returned by the taxpayer but was held to be exempt from tax could be described as having “escaped assessment,” thereby permitting the Agricultural Income‑Tax Officer to invoke the powers granted under section 26 to tax such income. This issue, which falls under the scope of section 34 of the Indian Income‑Tax Act, has been examined repeatedly by various High Courts, by the Privy Council, and by this Court. In its analysis, the Patna High Court observed that the prevailing judicial opinion supports the view that income deemed exempt can nonetheless be said to have escaped assessment. Accordingly, the High Court concluded that the officer’s authority to reassess the income under section 26 was valid.

The High Court, in holding that the Agricultural Income‑tax Officer possessed authority to revise his earlier assessment, relied upon the opening words of section 26, namely “for any reason,” and observed that it was unnecessary to assign a narrow meaning to the term “escaped.” The Court explained that when an item of income was not taxed because of a mistake or oversight by the tax authorities, that item could appropriately fall within the expression “escaped.” According to the High Court, the phrase “escaped assessment” was not limited to situations involving inadvertent omission; in view of the latter part of the provision, which referred to cases where income had been assessed at too low a rate, the term also encompassed instances of deliberate action by the authorities.

Counsel for the assessee argued that the generality of the words “any reason” did not affect the construction of “escaped assessment,” and that the word “assessment” denoted the entire process by which a tax liability was determined, not merely the final determination. Counsel further contended that because the income in question had been returned and held to be exempt, there was no “escaped assessment,” since the income had passed through the assessment procedure. He maintained that the latter part of the section, dealing with assessments made at too low a rate, could not be invoked to decide when income had escaped assessment, and that the provision did not apply to cases where income was returned but found not liable to tax. To support this position, he cited Maharaja Bikram Kishore v. Province of Assam, Commissioner of Income‑tax v. Day Brothers, Madan Mohan Lal v. Commissioner of Income‑tax (per Dalip Singh, J.) and Chimanram Motilal (Gold and Silver), Bombay v. Commissioner of Income‑tax (Central), Bombay (per Kania, J., as he then was).

The Attorney‑General, for the respondent, drew the Court’s attention to cases in which the view had been taken that even where income was returned and deliberately not taxed, the condition required for the application of the section was satisfied. He relied upon Anglo‑Persian Oil Co. (India) Ltd. v. Commissioner of Income‑tax, P. C. Mullick and D. O. Aich, In re, Commissioner of Income‑tax v. Raja of Parlakimedi, Chimanram Moti Lal (Gold and Silver), Bombay v. Commissioner of Income‑tax (Central), Bombay and Madan Mohan Lal v. Commissioner of Income‑tax. In addition, the Attorney‑General strongly cited the recent Supreme Court decision in Kamal Singh v. Commissioner of Income‑tax, Bihar and Orissa, where Justice Gajendragadkar, after reviewing all authorities, held that section 34 of the Income‑tax Act applied to a situation where an item of income was returned but, after consideration, was held not liable to tax.

The Court observed that section 34 of the Indian Income‑tax Act could be applied to a situation in which an item of income was returned but, after deliberate consideration, was held not to be liable to tax. Counsel for the assessee argued that this point had not been finally resolved by the earlier decision and cited the case of Chatturam Horilram Ltd. v. Commissioner of Income‑tax, Bihar and Orissa as reaching the opposite conclusion. Before turning to other High Court rulings, the Court decided it was necessary to examine whether the two Supreme Court decisions under discussion were relevant and, if so, which one should guide the present case. In the matter of Kamal Singh, the factual backdrop was as follows. The appellant’s father had been assessed to income‑tax for the assessment year 1945‑46. His total assessed income was Rs 1,00,000, which incorporated a sum of Rs 93,604 received as interest on arrears of rent after deduction of collection charges. The assessee contended before the Income‑tax Officer that this interest should be exempt from tax because it constituted agricultural income, relying on the Patna High Court judgment in Kamakshya Narain Singh v. Commissioner of Income‑tax. The Income‑tax Officer rejected the claim on the ground that an appeal against the High Court decision was pending before the Privy Council. On appeal, the Appellate Assistant Commissioner held that the Officer was bound by the High Court’s decision, set aside the Officer’s order and directed a fresh assessment. Accordingly, the Income‑tax Officer deducted the amount (1) (1926) I.L.R. 49 Mad. 22. (2) (1942) I.L.R. 1943 Bom. 206. (3) [1935] 3 I.T.R. 438. (4) A.I.R. 1959 S.C. 257. (5) [1955] 2 S.C.R. 290. (6) [1946] 14 I.T.R. 673. and taxed only the remaining balance after minor adjustments. His revised order was dated 20 August 1946.

Subsequently, in 1948 the Privy Council reversed the Patna High Court’s decision, as reported in Commissioner of Income‑tax v. Kamakshya Narain Singh. Following that reversal, the Income‑tax Officer issued a notice under section 34 of the Indian Income‑tax Act and, after hearing the assessee, again assessed the sum of Rs 93,604. After a series of procedural steps, which the Court deemed unnecessary to recount in detail, the matter came before the Supreme Court. The principal issue framed for determination was whether, under the circumstances of the case, the assessment order made under section 34 concerning the interest on arrears of rent was lawful. Two subsidiary questions were identified. The first asked whether the term “information” in the statute was broad enough to encompass knowledge of the state of the law or of a judicial decision on a point of law; the Court noted that this question was not material for the present determination. The second question concerned the point at which income could be said to have “escaped assessment,” with particular emphasis placed on the meaning of the word “assessment.”

The parties argued that the term “assessment” should not be limited to the final order of assessment but should encompass “all steps taken for the purpose of levying tax and during the process of taxation.” They further submitted that the word “escaped” meant that the income must have eluded observation, search, or, in other words, escaped the notice of the Income‑Tax Officer. Justice Gajendragadkar, however, refused to confine the expression to such a narrow construction. He observed that even when a taxpayer has filed a return, situations may arise in which the entirety of the income has not been assessed, and the portion that remains unassessed can properly be described as having escaped assessment. In the present matter, the rents received by the assessee from his agricultural lands were brought to the notice of the Income‑Tax Officer; the question of whether that amount could be assessed under the law was examined, and the decision of the Patna High Court, reported in (1948) 16 I.T.R. 325, was applied. That decision justified the assessee’s claim that the income in question was not liable to tax. The Court acknowledged that a part of the assessee’s income had indeed not been assessed and, in that sense, had clearly escaped assessment. The Court then asked whether it could be said that, because the matter had been considered and decided on its merits in accordance with the binding authority of the Patna High Court, no income had escaped assessment when that High Court decision was later reversed by the Privy Council. The Court found no justification for holding that cases of income escaping assessment must always arise from inadvertence, oversight, or the failure to file a return. In its view, even where a return has been filed, if the Income‑Tax Officer erroneously fails to tax a portion of assessable income, that portion has escaped assessment. Consequently, the appellant’s attempt to impose a very narrow and artificial limitation on the meaning of “escape” in section 34(1)(b) could not succeed.

The assessee sought to distinguish the earlier case on the ground that the Supreme Court had laid down the law in special circumstances where a new interpretation of the statute was given, and that the present situation was not one of the Income‑Tax Officer simply changing his mind. He contended that some information had reached the Income‑Tax Officer, and that his subsequent action could be based on that information. The counsel for the assessee argued that Justice Gajendragadkar had expressly left open the question of what should happen where there was no external information and the Income‑Tax Officer merely changed his mind. Reference was made to observations in the judgment which stated, “It appears that, in construing the scope and…”

In the matter before the Court, it was observed that the High Courts had, on several occasions, been called upon to decide whether an Income‑tax Officer could invoke section 34 of the Income‑tax Act on the basis that he merely reconsidered his original assessment decision without obtaining any fresh information from an external source. The courts also examined whether a successor to the Income‑tax Officer could rely on section 34 when the assessment order of his predecessor was alleged to be erroneous. These questions had attracted divergent opinions in the judicial forum.

Representing the respondent, counsel submitted that the amendment of section 34 in 1948 permitted an Income‑tax Officer to act under the provision even if his only basis for action was a change of mind, absent any new external information, and that such a change could lead to the conclusion that, in a particular case, the assessee’s income had escaped assessment. The Court noted that it did not intend to express any opinion on that contention in the present appeal.

The Court then turned to the language of section 26 of the Agricultural Income‑tax Act, emphasizing that its wording did not require the possession of fresh information. Section 26 states: “If for any reason any agricultural income chargeable to agricultural income‑tax has escaped assessment for any financial year the Agricultural Income‑tax Officer may proceed to assess such income.” The expression “any reason” was held to be of wide import and to dispense with the conditions that circumscribe section 34 of the general Income‑tax Act. Consequently, the issue left open by Gajendragadkar, J. could not arise under the present Act. In light of this clear stance, the Court found it unnecessary to revisit the earlier authorities that had been examined in that judgment.

Among the authorities previously considered, the Court highlighted the judgments of Gajendragadkar, J., as well as those of Harries, C. J., and Mukherjea, in Maharaja Bikram Kishore v. Province of Assam. In instances where a contrary view had been adopted, reliance had been placed upon the Privy Council decision in Rajendra Nath Mukerjee v. Income‑tax Commissioner (1) [1949] 17 I.T.R. 220, (2) (1933) L.R. 61 I.A. 10, 16. In that decision the Council observed: “The fact that s. 34 requires a notice to be served calling for a return of income which had 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.” The Court noted that the factual matrix of that case was entirely different, because the income in question had been returned but not yet processed when the notice under section 34 was issued.

The Court further pointed out that the Privy Council had approved the observations of Rankin, C. J., in In re: Lachhiram Basantlal, namely that “Income has not escaped assessment if there are pending at the time proceedings for the assessment of the assessee’s income which have not yet terminated in a final assessment thereof.” Their Lordships also rejected an interpretation that would deem income, which had been returned for assessment in January 1928 and accepted as correctly returned, as having “escaped” assessment for the year 1927‑28. The Council concluded that, for the purposes of section 34, the income of Burn & Co. did not “escape assessment” in that year. The Court affirmed that these observations were made in the specific context of pending assessment proceedings and that the same principle applied to the present case.

The Court explained that the phrase “has escaped assessment” must not be interpreted as synonymous with “has not been assessed.” The Court said that such an interpretation would give an overly broad meaning to the word “assessment” and an excessively wide meaning to the word “escaped.” The Court pointed out that this observation was made in the factual context before the Lordships, as illustrated by a passage that referred to the income of Burn & Co. The income of Burn & Co. had been returned for assessment in January 1928 and had been accepted as correctly returned, even though it had been mistakenly included in the assessment of Martin & Co. The Lordships held that to say that this income “escaped assessment” in the year 1927‑28 was an inadmissible reading. Accordingly, the Court found it sufficient for the disposal of the appeal to hold that the income of Burn & Co. did not “escape assessment” in the year 1927‑28 within the meaning of section 34. The remarks were made in the context of assessment proceedings that were still pending and had not terminated in a final assessment. The Court further clarified the point by noting that if no notice calling for a return under section 22 is issued within the tax year, then section 34 (1) (1930) I.L.R. 58 Cal. 909, 912 provides the only means for the Crown to remedy the omission, but that situation is a different matter. In the Court’s opinion, the error in the cases relied upon by the assessee lay in taking the dicta from the Burn & Co. case out of the context in which it was made and applying it to facts where it does not fit. The judgment of Gajendragadkar, J. had already dealt with the issue in a satisfactory manner, and the Court saw no need to revisit the same ground. The preponderance of opinion in the High Courts also accepted the contrary view, and the Court agreed with that approach.

The counsel for the assessee argued that the decision of this Court in Messrs. Chatturam Horilram Ltd. v. Commissioner of Income‑Tax, Bihar & Orissa disclosed a different view and should be followed instead of the later view expressed by Gajendragadkar, J. The Court did not think that the point raised in the Chatturam case was the same as the point under consideration. The same case had been relied upon before the Bench of Venkatarama Aiyar, Gajendragadkar and Sarkar, JJ., and Gajendragadkar, J. had distinguished it. The Court quoted Gajendragadkar, J.’s observation that Mr. Sastri also relied on the Chatturam decision to support his construction of section 34. In Chatturam’s case, the assessee had been assessed to income‑tax, the assessment was reduced on appeal, and the Income Tax Appellate Tribunal set it aside on the ground that the Indian Finance Act of 1939 was not in force during the assessment year in Chota Nagpur. The Court therefore concluded that the Chatturam decision did not address the same issue and could not be pressed as authority to depart from the view expressed by Gajendragadkar, J.

In the case before this Court, the High Court had upheld the decision of the tribunal after a reference was made. After that judgment, the Governor of Bihar issued Bihar Regulation IV of 1942, which gave retrospective force to the Indian Finance Act of 1939 in the Chota Nagpur region, making it effective as of 30 March 1939. The Governor‑General subsequently gave assent to this ordinance. On 8 February 1944 the Income‑Tax Officer issued an order under section 34 of the Act, and proceedings were initiated against the assessee. Those proceedings culminated in the assessment of the assessee to income tax.

The assessee challenged the assessment before this Court, contending that the notice issued under section 34 was invalid. This Court examined the matter and held that the income, profits or gains that the assessing authority sought to tax were indeed chargeable to income tax. The Court further observed 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.

Mr Sastri argued that the decision was inconsistent with his earlier submission and relied on observations made by Jagannadhadas J, who had said 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.” Mr Sastri emphasized that the learned judge had explained that earlier assessment proceedings had failed to produce a valid assessment because of a lacuna not attributable to the assessing authorities, even though the income was chargeable to tax.

Mr Sastri further maintained that section 34 could be invoked only in cases where income escaped assessment due to a lacuna other than one caused by the assessing authorities. This Court, however, did not accept that narrow construction. The Court held that the observations cited by Mr Sastri were made in the specific factual context of the earlier case and must be read in that context. It would be unreasonable to restrict the operation of section 34 solely to situations where the escapement of income is attributable to reasons external to the assessing authorities. Jagannadhadas J had also cautioned that it was unnecessary to precisely define what constitutes escapement from assessment; it would suffice to decide the case on the narrow ground already outlined.

Consequently, this Court found that the earlier decision did not assist the appellant. For the reasons set out above, the Court is of the opinion that the Agricultural Income‑Tax Officer was competent, under section 26 of the Act, to assess an item of income that had previously been omitted from tax, even though in

The Court observed that the return in question had shown the income as included, and the Agricultural Income‑Tax Officer had subsequently assumed that the same income was exempt. Accordingly, the High Court’s decision that the officer’s approach was correct was affirmed. The Court then turned to the two documents that formed the basis of the dispute. Both documents were plain indentures of lease executed between the Rani and the assessee. From the terms of those indentures it was evident that, in consideration of a payment of Rs. 17,16,000, the lessee was granted possession of the leasehold property for a period of twenty‑eight years. The indentures did not contain any express term that would render the sum a loan repayable either by repayment of capital or by the enjoyment of a usufruct. Nor was any interest stipulated, nor any right of redemption granted to the lessee. Furthermore, the documents did not provide for any personal liability on the part of the lessee should any amount remain outstanding at the expiration of the twenty‑eight‑year term. The Court noted that these factors constitute the tests used to determine whether a transaction is a “zarpeshgi” lease or a lease coupled with a mortgage, as explained in Mulla’s Transfer of Property Act, fourth edition, page 352. While the clause in question could, in isolation, be interpreted in various ways, the Court held that such isolated construction would not convey the true meaning of the clause when read in the context of the entire instrument. By reading the whole instrument, the Court found that it expressly exempted the lessor from liability for collection charges, making it clear that such charges were to be borne by the lessee. The Court further explained that, had the instrument omitted this provision, a dispute might have arisen as to which party should bear those expenses. Counsel for the assessee highlighted the final clause of the instrument dated 31 January 1936, but the Court observed that this clause was a special covenant dealing with matters not covered by the main instrument. The Court concluded that the income derived from the leasehold land fell within the definition of “agricultural income.” Accordingly, the appeal was dismissed with costs, and the Court ordered that the appeal fail.