Esthuri Aswathiah vs The Income-Tax Officer, Mysore State on 5 December, 1960

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

Court: supreme-court

Case Number: Civil Appeal No. 200 of 1960

Decision Date: 5 December 1960

Coram: J.C. Shah, J.L. Kapur, M. Hidayatullah

In this case the Supreme Court of India, consisting of Justices J.C. Shah, J.L. Kapur and M. Hidayatullah, delivered a judgment dated 5 December 1960 concerning a petition filed by Esthuri Aswathiah against the Income‑Tax Officer of Mysore State. The petitioner was a Hindu undivided family carrying on business in the former State of Mysore. The citation for the decision is 1961 AIR 1149 and 1961 SCR (2) 911; a citator reference is RF 1967 SC 916 (8). The matters involved provisions of the Indian Income‑tax Act, 1922 (11 of 1922), specifically sections 34(1)(a), 23(1) and 22(3), as well as section 13(1) of the Finance Act, 1950 (XXV of 1950) and clause 5(1) of Part‑B States (Taxation Concessions) Order, 1950.

The facts recorded show that the appellants were assessed under the Mysore Income‑tax Act for the assessment year 1949‑50, which corresponded to the accounting year from 1 July 1948 to 30 June 1949. The Indian Income‑tax Act became operative in that territory on 1 April 1950. On 26 December 1950 a notice issued under section 22(2) of the Indian Act required the appellants to file a return for the assessment year 1950‑51. The appellants filed such a return on 8 September 1952, stating that they had no assessable income for that year. The Income‑Tax Officer entered an order stating “no proceeding” and closed the assessment. When the appellants filed a return for the subsequent assessment year, their books disclosed an opening cash credit balance of Rs 1,87,000‑odd as of 1 July 1949. They were unable to produce the books of account for the preceding years, and the Officer held that Rs 1,37,000 of the opening balance represented income from an undisclosed source. The appellants then submitted a fresh return for the assessment year 1950‑51, purporting to do so under section 22(3) of the Indian Income‑tax Act. Following a direction of the Appellate Assistant Commissioner, the Income‑Tax Officer served a notice under section 34 on 15 October 1957. The appellants challenged the notice and the proceeding before the High Court under article 226, claiming that the notice was issued without jurisdiction. The High Court dismissed the petition.

The Supreme Court held that it was incorrect to say that the issuance of the notice for reassessment was without jurisdiction, because the assessment was still pending. Under section 23(1) of the Indian Income‑tax Act, the Income‑Tax Officer is authorized, if satisfied with the correctness of the return filed by the assessee, to determine the tax liability on the basis of that return without requiring the assessee’s presence or production of evidence. Consequently, the order “no proceeding recorded on the return” signified that the Officer had accepted the earlier return and had assessed the income as nil. Therefore, a revised return filed by the assessee under section 22(3) could be entertained.

In this case, the Court observed that a return filed by a taxpayer may be lodged only prior to the issuance of an assessment order and not thereafter. Nevertheless, the filing of such a return after the assessment does not prevent the Assessing Officer from exercising the power of reassessment under section thirty‑four sub‑paragraph one of the Income‑Tax Act. The Court further ruled that, when the provisions of section thirteen paragraph one of the Finance Act (twenty‑fifth of 1950) and clause five paragraph one of Part B States (Taxation Concessions) Order 1950, which were issued by the Central Government under section sixty‑A of the Indian Income‑Tax Act, are taken into account, it cannot be said that for the assessment year nineteen‑fifty‑zero‑one the appellants were liable to tax under the Mysore Income‑Tax Act instead of the Indian Income‑Tax Act.

The appeal, designated as Civil Appeal number two hundred of 1960, arose from an order dated nineteen March nineteen‑five‑nine of the Mysore High Court at Bangalore, which had dismissed a writ petition numbered two‑six‑three of 1957. The appeal was presented with a certificate of fitness granted by the High Court of Judicature of Mysore. The respondents were the appellants, who were a Hindu Undivided Family engaged in the trade of groundnuts and other commodities at Goribidnur in Kolar District, a region that had formerly formed part of the State of Mysore. The Mysore Income‑Tax Act had been repealed, and the Indian Income‑Tax Act was brought into operation in the Part‑B State of Mysore effective from one April nineteen‑fifty. The appellants had adopted a financial year running from the first of July to the thirtieth of June of the following year. Accordingly, they were assessed for the year nineteen‑four‑nine‑fifty under the Mysore Income‑Tax Act for the period July one, nineteen‑four‑eight to June thirty, nineteen‑four‑nine, which corresponded to assessment year nineteen‑four‑nine‑fifty. After the Indian Income‑Tax Act became applicable to Mysore on twenty‑six December nineteen‑fifty, a notice issued under section twenty‑two sub‑paragraph two of the Act was served on the appellants, requiring them to file a return of income for assessment year nineteen‑fifty‑zero‑one. On eight September nineteen‑fifty‑two, the appellants filed their return, stating that for the year ending thirty June nineteen‑four‑nine, which matched assessment year nineteen‑four‑nine‑fifty, they had been assessed under the Mysore Act; that their income for the year ending thirty June nineteen‑fifty was assessable under the Indian Act in assessment year nineteen‑fifty‑one‑fifty‑two; and that they had no assessable income for assessment year nineteen‑fifty‑zero‑one. The Income‑Tax Officer, relying on that return, entered an order marked “no proceeding” and closed the assessment for that year. Subsequently, for assessment year nineteen‑fifty‑one‑fifty‑two, the appellants lodged another return of income. In the books of account they produced, an opening cash‑credit balance of approximately one hundred eighty‑seven thousand rupees was shown as of one July nineteen‑four‑nine. The Assessing Officer then requested that the appellants produce their books of account for the preceding years, but the appellants declined to do so, pleading that those books had been lost.

The Income Tax Officer noted that the books of account for the earlier years had been lost, and therefore the appellant could not produce them. In assessing the income for the year of account 1949‑50, the Officer concluded that Rs 1,37,000 of the opening balance shown in the books dated 1 July 1949 represented income from an undisclosed source. The appellant appealed this assessment. The Appellate Assistant Commissioner observed that the appellant had not exercised the option provided under section 2(ii) of the Indian Income Tax Act and that the appellant had no established system of accounting. Consequently, the Commissioner held that the only reasonable approach for the Income Tax Officer was to treat the financial year ending 31 March 1950 as the preceding year for the purpose of identifying income from an undisclosed source. The Commissioner therefore directed the Officer to take the contested credit into account in the assessment for the year 1950‑51, but only after giving the appellant an opportunity to explain the nature and source of that credit.

Before the Appellate Assistant Commissioner could dispose of the appeal, the appellant filed a fresh return for the assessment year 1950‑51, claiming that it was made under section 22(3) of the Indian Income Tax Act. Acting on the Commissioner’s earlier direction, the Income Tax Officer issued a notice of reassessment under section 34 of the Income Tax Act on 15 October 1957, requiring the appellant to file a new return. The appellant responded by filing a petition under article 226 of the Constitution in the High Court of Mysore, seeking a declaration that the notice issued under section 34 was beyond the Officer’s jurisdiction and requesting that the notice and the subsequent proceedings be set aside. The High Court dismissed the petition, but on the appellant’s application the High Court certified that the matter was appropriate for appeal to this Court.

At the relevant time, section 34(1) of the Indian Income Tax Act provided, in substance, that if the Income Tax Officer had reason to believe that, because of an omission or failure by the assessee to file a return under section 22 for any year, or to disclose fully and truly all material facts necessary for assessment for that year, income, profits or gains chargeable to tax had escaped assessment for that year, or if, notwithstanding any such omission, the Officer, on the basis of information in his possession, believed that income, profits or gains had escaped assessment for any year, then the Officer could, in cases falling under clause (a), within eight years of the end of that year, and in cases falling under clause (b), within four years of the end of that year, serve the assessee with a notice containing any of the requirements that could be included in a notice under subsection (2) of section 22, and proceed to assess or reassess such income, profits or gains. The Act further provided that the provisions of the Act shall, as far as may be, apply as if the notice were a notice issued under that subsection.

The judgment explained that the provision concerning the effect of a notice was to be applied as if the notice had been issued under the specific sub‑section referred to. During the assessment for the fiscal year 1951‑52, the appellants presented their books of account which contained an entry dated 1 July 1949 showing an opening cash balance of approximately Rs 1,87,000. This balance was not satisfactorily explained, and when the authorities requested the accounts for the earlier year, the appellants failed to produce them. In addition, the appellants had not disclosed any income in their return for the assessment year 1950‑51. Because of these omissions, the Income Tax Officer held that there were reasonable grounds to believe that, owing to the appellants’ failure to disclose fully and truthfully all material facts necessary for assessment, taxable income had escaped assessment for that year. Consequently, the Officer possessed jurisdiction to issue a notice under section 34(1) for reassessment.

The Court rejected the argument that the earlier return filed on 8 September 1952 had not been finally disposed of, and therefore a reassessment notice could not be issued until that assessment was completed. It held that the Income Tax Officer had already disposed of the proceeding by accepting the appellants’ claim that they had no income for the year 1950‑51. Under section 23(1) of the Indian Income Tax Act, when the Officer is satisfied that a return filed under section 22 is correct, he may assess the tax liability based solely on that return, without requiring further evidence or the physical presence of the assessee. The appellants’ return of 8 September 1952 expressly stated that they had no assessable income for the year in question, and the Officer’s order of “no proceeding” signified that the return was accepted and the income was assessed as nil.

The judgment further clarified that if, after accepting such a return, the Officer later discovers that the appellants had failed to disclose all material facts, he is empowered to issue a reassessment notice. Section 22, sub‑section (3), allows an assessee to file a revised return when an omission or error is discovered after the original return has been filed, but only if the revised return is filed before the assessment is made. Since the revised return dated 26 February 1957 was filed after the assessment based on the earlier return had already been completed, it could not be entertained. Moreover, the filing of that later return did not bar the Officer from commencing reassessment proceedings under section 34(1). The Court also dismissed the contention that the assessment for the year 1950‑51 should be governed by the Mysore Income Tax Act rather than the Indian Income Tax Act, finding no merit in that argument.

It was held that, according to section 13, clause (1) of the Finance Act XXV of 1950, the following provision applied: “If immediately before the 1st day of April, 1950, there is in force in any Part‑B State…… any law relating to income‑tax or super‑tax or tax on profits of business, that law shall cease to have effect except for the purposes of the levy, assessment and collection of income‑tax and super‑tax in respect of any period not included in the previous year for the purposes of assessment under the Indian Income Tax Act, 1922 (XI of 1922), for the year ending on the 31st day of March, 1951, or for any subsequent year.” By virtue of that clause, the Mysore Income Tax Act ceased to operate from 1 April 1950, remaining applicable only for the levy, assessment and collection of tax on periods that were not part of the “previous year” for assessment under the Indian Income Tax Act for the assessment year 1950‑51. The appellants had previously been assessed for the period 1 July 1948 to 30 June 1949 under the Mysore Act. It was therefore clear that any account year which constituted the “previous year” for the assessment year 1950‑51 fell within the scope of the Indian Income Tax Act, not the repealed Mysore legislation. Consequently, the account year covering 1 July 1949 to 30 June 1950 was not a period preceding such “previous year”; hence the liability for tax on that period could only be assessed under the Indian Income Tax Act and not under the Mysore Act.

The contention was raised that the interpretation of section 13 might, where an assessee’s account year did not coincide with the financial year, lead to double taxation of income for the account year ending between 1 April 1949 and 31 March 1950. To avoid that possibility, the Central Government, exercising powers under section 60A of the Indian Income Tax Act, issued the Part‑B States (Taxation Concessions) Order 1950. Clause 5(1) of that Order provides, among other matters, that the income, profits and gains of any “previous year” ending after 31 March 1949—which is a previous year for the State assessment year 1949‑50—shall be assessed under the Indian Income Tax Act for the year ending 31 March 1951, provided such income, profits and gains had not, before the appointed day, been assessed under the State law. Accordingly, if, for the “previous year” relevant to the assessment year ending 31 March 1951, the appellants had been assessed by any State Government under a law relating to income‑tax then in force, the Indian Income Tax authorities would lack jurisdiction to assess that income; but in the absence of such State assessment, the income remained assessable under the Indian Income Tax Act.

In the State, the Indian Income Tax authorities would not have had the power to assess the appellants’ income for that particular year; however, because the State authorities failed to make such an assessment, the income of the appellants for that year became assessable under the Indian Income Tax Act. The notice issued under section 34 was not served after the period prescribed for such notice had expired. The Income Tax Officer issued the notice because he had reason to believe that, due to the appellants’ failure to disclose fully and truthfully all material facts necessary for the assessment of the year 1950‑51, some income had escaped assessment. That belief placed the notice squarely within the scope of section 34(1)(a), which authorises the issuance of a notice for reassessment within eight years from the end of the year of assessment. Accordingly, the notice issued under section 34 for reassessing the appellants’ income for the year 1950‑51 was, in the Court’s view, properly issued. The High Court was therefore correct in dismissing the petition that sought a writ to quash the notice. Consequently, the appeal was dismissed and the appellants were ordered to pay costs.