Pannalal Nandlal Bhandari vs The Commissioner Of Income-Tax, Bombay

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 408 of 1957

Decision Date: 18 October, 1960

Coram: J.C. Shah, S.K. Das, M. Hidayatullah

Pannalal Nandlal Bhandari appealed against a decision of the Commissioner of Income‑Tax, Bombay City, and the case was decided by a Bench of the Supreme Court of India consisting of Justices J. C. Shah, S. K. Das and M. Hidayatullah. The judgment was delivered on 18 October 1960 and is reported in 1961 AIR 446 and 1961 SCR (2) 35, with a cited reference in RF 1962 SC 478 (9). The dispute concerned the provisions of the Indian Income‑Tax Act, 1922 (XI of 1922), specifically sections 22(1) and 22(2), and sections 34(1)(a) and 34(1)(b). The appellant, who was classified as a non‑resident for the purposes of the Act, had received dividend income that accrued within the taxable territory of British India for the assessment years 1943‑44, 1944‑45, 1946‑47 and 1947‑48, but he did not file tax returns for those years. Consequently, the Income‑Tax Officer issued notices under section 34 read with section 22(2) to assess tax for each of those years. The notices were served within eight years from the end of the respective assessment years, thereby satisfying the limitation period prescribed by section 34(1)(a). The appellant contended that the notices should be governed by clause (1)(b) of section 34, arguing that as a non‑resident he was not required to file a return under a general notice of section 22(1), and that his failure to file did not constitute an omission or failure to submit a return, which he claimed barred the assessment on limitation grounds. The Court held that the expression “every person” in section 22(1) includes all persons liable to tax, and that non‑residents are not exempt from the duty to submit a return when a notice is issued in the manner prescribed by section 22(1). The Court further explained that failure to file a return after such a notice is deemed an omission within the meaning of section 34(1)(a). Section 34(1)(b) applies only where there is no omission or failure to disclose full and true facts material to the assessment. Accordingly, the assessment proceedings in this case were properly commenced within the statutory period of limitation under section 34(1)(a). The Court therefore dismissed the appellant’s claim that the assessment was barred by limitation. The judgment affirmed the assessment orders and upheld the validity of the notices issued to the appellant.

In the present appeal, counsel for the appellant, A. N. Kripal, R. H. Dhebar and D. Gupta, appeared for the respondent. The judgment was delivered on 18 October 1960 by Justice Shah. The appellant was classified as a non‑resident for the purposes of the Indian Income Tax Act, 1922. During the assessment years 1943‑44, 1944‑45, 1946‑47 and 1947‑48 the appellant earned dividend income that fell within the taxable territory of British India, yet he failed to file any income‑tax returns for those years. Acting under the authority granted by section 34 of the Indian Income Tax Act, 1922, the Income Tax Officer of Bombay City issued assessment notices to the appellant, invoking section 22(2) of the Act. The notice relating to the year 1943‑44 was dispatched on 27 March 1952; the notice for 1944‑45 was sent on 16 February 1953; the notice for 1946‑47 was delivered on 4 April 1951; and the notice for 1947‑48 was served on 2 April 1952. Subsequent to the issuance of these notices, the Officer completed the assessments for the years 1943‑44, 1944‑45 and 1947‑48 on 6 May 1953, and for the year 1946‑47 on 19 March 1952. These assessment orders were affirmed by the Appellate Assistant Commissioner and later by the Income Tax Appellate Tribunal. The appellant then prompted the Tribunal to prepare a statement of the case under section 66(1) of the Income Tax Act and to refer two questions to the High Court of Judicature at Bombay. The first question asked whether the notices served under section 22(2) together with section 34 for the four assessment years had been issued after the limitation period prescribed by section 34. The second question inquired, if the answer to the first was affirmative, whether the assessments would be void as a matter of law. The High Court answered the first question in the negative, concluding that the notices had been served within the allowed time, and therefore held that the second question did not arise.

With special leave under Article 136 of the Constitution, the appellant filed the present appeal challenging the High Court’s order. The sole issue for determination in this appeal is whether the assessment proceedings were initiated within the limitation period prescribed for serving assessment notices under clause (a) of section 34(1) of the Act. At the relevant time, clause (a) empowered the Income Tax Officer, among other powers, to serve a notice of assessment at any time within eight years after the end of the assessment year if he reasonably believed that income, profits or gains had escaped assessment because of an omission or failure by the assessee to file a return under section 22 for that year, or to fully and truthfully disclose all material facts necessary for assessment. In circumstances where the Officer possessed information that led him to believe that income, profits or gains had escaped assessment even though there was no omission or failure as described in clause (a), he could, under clause (b), serve a notice of assessment within four years after the end of the assessment year. The appellant conceded that the notices were issued within eight years of the close of the assessment years, which would render the assessment valid if clause (a) applied. However, the appellant argued that, because he was a resident outside the taxable territory during those years, a general notice under section 22(1) did not create a duty to file a return, and consequently the notices should be governed by clause (b) rather than clause (a). The appellant maintained that his inaction did not amount to an omission or failure under clause (a).

In this case, the Court observed that when the Income Tax Officer possessed information giving him reason to believe that income, profits or gains had escaped assessment, he could act under clause (b) of section 34(1) and serve a notice of assessment within four years from the end of the year of assessment, even though there was no omission or failure by the assessee as described in clause (a). The Court noted that the notices issued by the Income Tax Officer for the years that were the subject of this dispute were indeed served within eight years from the end of the relevant years of assessment. Consequently, if clause (1)(a) of section 34 applied, the assessment would not be barred by the law of limitation.

The appellant, however, argued that the notices for assessment, despite his failure to make a return of his income for the years in question, should be governed not by clause (1)(a) but by clause (1)(b) of section 34. He maintained that because he was a resident outside the taxable territory during the years of assessment, a general notice issued under section 22(1) did not create an obligation to file a return, and therefore his inaction could not be characterised as an omission or failure that would attract the operation of clause (1)(a). The appellant further submitted that an omission or failure to make a return could arise for a non‑resident only when no return is filed after the service of an individual notice under section 22(2). In other words, he pleaded that a notice under section 22(1) imposes a filing duty on persons resident within the taxable territory and not on non‑residents, and he sought support for this position from section 1, sub‑section (2), which had extended the Income Tax Act at the material time to British India.

The Court examined the language of section 22(1), which states that “every person whose total income during the previous year exceeded the maximum amount which is not chargeable to income‑tax” must comply with the notice. The Court held that this expression includes all persons who are liable to pay tax and that nothing in the provision or its context exempts non‑residents from the liability to submit a return pursuant to a notice issued under that clause. The Court further rejected the appellant’s contention that the non‑resident’s lack of knowledge of the general notice could defeat the plain words of the section. The Court emphasised that the clause, read together with rule 18, obliges every person who has taxable income to submit his return, and that failure to do so triggers the powers conferred by section 34. Accordingly, the Income Tax Officer may commence assessment proceedings within the period prescribed by clause (1)(a) when there is an omission or failure to file a return or to make a full and true disclosure of material facts.

The Court clarified that section 34(1)(b) applies only in situations where there is no omission or failure to make a return or to disclose facts material to the assessment. The appellant’s own case admitted that the non‑resident income had accrued in the taxable territory and that such income exceeded the maximum amount not chargeable to income‑tax. Yet, because the appellant did not submit a return in response to the notice issued under section 22(1), the Income Tax Officer was competent, under clause (1)(a), to issue a notice of assessment within the eight‑year limitation period.

The Court observed that the Income Tax Officer possessed the authority under section 34(1)(a) to issue a notice at any time within eight years after the end of the assessment year for the purpose of assessing tax. It further explained that once a notice had been published in the press and served in the manner prescribed by section 22(1), every person whose total income exceeded the maximum amount exempt from tax was legally required to file a return; failure to do so was to be treated as an omission within the meaning of section 34(1)(a). The Court rejected the argument that section 22(1) applied only to resident persons and that a non‑resident’s duty to file a return could arise solely from a notice issued under sub‑section (2). While sub‑section (2) allowed the Income Tax Officer to serve a special notice on any person requiring the filing of a return in the prescribed form, the Court held that this provision did not diminish or remove the liability to file a return that arose under sub‑section (1). The Court noted that the Income Tax Act, by virtue of section 1(2), extended only to the taxable territory and not beyond; however, within that territory the Officer retained the power to tax income that accrued, arose, or was received, a point which the appellant did not dispute. Consequently, the Court found no basis for the contention that the general provision imposing liability on persons receiving taxable income was implicitly limited to residents. The Court also dismissed the submission that a person liable for tax but residing outside the taxable territory must first be served with a special notice under section 22(2) before his failure to file could be deemed an omission under section 34(1); it emphasized that no such express provision existed in the statute and none could be inferred from the context. Accordingly, the Court affirmed that the High Court was correct in holding that the assessment proceedings had been lawfully initiated within the limitation period prescribed by section 34(1)(a) from the close of the assessment year. The appeal was therefore dismissed with costs.