The Commissioner Of Income Tax, Bombay vs M/S. Narsee Nagsee And Co., Bombay on 6 May, 1960

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 319 of 1958

Decision Date: 06 May 1960

Coram: J.L. Kapur, S.K. Das, M. Hidayatullah

The Supreme Court of India delivered its judgment on 6 May 1960 in the matter of The Commissioner of Income Tax, Bombay City 1, Bombay versus M S Narsee Nagsee and Co., Bombay. The bench that heard the petition comprised Justice J L Kapur, Justice S K Das and Justice M Hidayatullah. The case was reported in the 1960 All India Reporter at page 1232 and subsequently cited in later reports, including the 1964, 1968 and 1977 Supreme Court law reports. The dispute concerned the operation of the Business Profits Tax Act, 1947, specifically the interaction between section 11(1), which authorised the issuance of a notice requiring the filing of a return, and section 14, which imposed a four‑year limitation on the assessment of profits that had escaped assessment. The respondent, a firm engaged in business in Bombay, received on 21 January 1953 a notice issued under section 11(1) of the Act. The notice related to the chargeable accounting period from 13 November 1947 to 31 October 1948 and demanded that the firm submit its return for that period. The firm filed the return under protest, asserting that the notice was invalid because it was served beyond the four‑year period prescribed in section 14.

The Court was asked to determine whether the limitation period contained in section 14 must be read into section 11, and whether profits that were not brought to assessment because a notice under section 11 was issued out of time should be treated as “profits escaping assessment,” thereby allowing only remedial action under section 14 within the specified four‑year window. The majority, represented by Justices S K Das and J L Kapur, held that the phrase “profits escaping assessment” in section 14 applied not only to situations where a notice had been served but resulted in no assessment, under‑assessment or excessive relief, but also to cases where, for any reason, no notice had been issued and consequently no assessment of income had taken place. Accordingly, the Court read sections 11 and 14 together and concluded that a notice under section 11 could not be issued after the expiry of the four‑year period prescribed in section 14. The Court relied on the decisions in Kamal Singh v. Commissioner of Income‑Tax, [1959] Supp. 1 S C R 10 and Mahayajadhiraj Sir Kameshwar Singh v. State of Bihar, [1960] 1 S C R 332, while distinguishing Gokuldas Ratanji Mandavia v. Commissioner of Income‑Tax, [1959] A C 114. Justice Hidayatullah delivered a dissenting opinion, stating that section 11 was confined to cases where there had been no prior assessment, whereas section 14 applied only after an assessment had been made and profits were later discovered to have escaped assessment.

The Court explained that the phrase “escaped assessment” in the Business Profits Tax Act is limited to situations where the profits of a business have been brought before the tax authorities but, for some reason, certain profits were not assessed, were assessed at a lower amount, or received an excessive relief. In such cases the statute allows a subsequent reassessment, but that reassessment must be made within four years from the end of the relevant accounting period. By contrast, the Act imposes no time limit on an initial assessment that is made for the first time. The matter before the Court was a civil appeal numbered 319 of 1958, filed against the judgment and order dated 5 September 1956 of the Bombay High Court in Income‑Tax Reference No. 31 of 1956. The appellant, the Commissioner of Income‑Tax, was represented by counsel for the government, while the respondent, a firm engaged in business in Bombay, was represented by counsel for the respondents. An intervenor, the Punjab National Bank Ltd., also appeared through counsel. The appeal was heard on 6 May 1960, and judgments were delivered by two senior judges, one of whom authored a separate opinion. The present appeal challenged the High Court’s decision in the referenced Income‑Tax case. The dispute concerned an assessment for the year of assessment 1949‑50, covering the chargeable accounting period from 13 November 1947 to 31 October 1948. On 12 January 1953 the Income‑Tax Officer issued a notice under section 11(1) of the Act concerning that accounting period; the notice was served on the respondent on 21 January 1953. The respondent filed its return protesting the notice. The officer completed the assessment on 30 November 1953. The respondent appealed this assessment to the Appellate Assistant Commissioner, arguing that the assessment was barred by the four‑year limitation prescribed in section 14 of the Act. The Appellate Assistant Commissioner agreed with the respondent, and the Income‑Tax Officer subsequently appealed to the Appellate Tribunal, which affirmed the Assistant Commissioner’s order. At the direction of the Commissioner, the matter was then presented to the Bombay High Court for determination of two legal questions: first, whether the Income‑Tax Officer had the authority to assess the firm by issuing a notice under section 11(1) on 12 January 1953 for the accounting period 13 November 1947 to 31 October 1948 without invoking section 14 of the Act; and second, if the answer to the first question was negative, whether the assessment made could be considered validly effected.

In this case the Court observed that the High Court had altered the original first question by removing the phrase “without having recourse to Section 14 of the Business Profits Tax Act” and had answered both of the questions in the negative. The Income‑tax Appellate Tribunal had previously held that, because section 14 of the Act fixes the limitation period as beginning at the end of the chargeable accounting period in question, a notice issued under section 11(1) must be served before that period expires. The High Court rejected that view. It held that sections 11 and 14 must be read together and that the reference to four years in section 14 provides an important indication of the limitation period applicable to the issuance of a notice under section 11 as well. Moreover, the Court reasoned that if profits which have escaped assessment can be taxed only within four years of the end of the chargeable accounting period pursuant to section 14, then logically the escape of assessment must have occurred sometime before the end of that four‑year period. Since, on the facts of the present case, the notice under section 11 was issued four years after the close of the chargeable accounting period, the High Court concluded that the notice was not valid. The appellant challenged this decision by filing an appeal to this Court on a certificate of the High Court. The appellant submitted that, although sections 11 and 14 must be read together, they govern different circumstances. Section 11, the appellant argued, applies where the Income‑tax Officer requires any person whom he believes to be engaged in any business to which the Act applies, or to have been so engaged during any chargeable accounting period, to furnish a return with respect to that period. Section 14, on the other hand, applies where, based on definite information in the officer’s possession, the Income‑tax Officer discovers that the profits of a business for a particular chargeable accounting period have escaped assessment. In other words, section 11 deals with original assessments following the first notice that calls upon an assessee to file a return for the profits of a chargeable accounting period, whereas section 14 becomes relevant when such a notice has already been issued and either no assessment was made or there was an under‑assessment. Accordingly, the appellant argued that the Act does not prescribe any limitation period for the initial notice requiring a return for any chargeable accounting period. However, if that notice is given, a return is filed, and for any reason the profits are not assessed or are under‑assessed, then section 14 becomes operative and a notice must be served within four years of the end of the chargeable accounting period in question. The provisions of the

The Court listed the statutory provisions that were before it for consideration. These were sections two, four, five, eleven and fourteen of the Act. Section two was described as the definition clause, section four as the charging clause and section five as dealing with the scope of the Act. Section eleven dealt with the issue of a notice for assessment, while section fourteen dealt with profits that escaped assessment. Section two paragraph two defined the term “accounting period” and paragraph four defined “chargeable accounting period.” Under section four the Court explained that for any business to which the Act applied a tax was to be charged, levied and paid on the taxable profit for each chargeable accounting period. The tax rate specified in the original statute was sixteen and two‑thirds per cent of the taxable profit, a rate that was later reduced by the Finance Acts of 1948 and 1949. Section five was explained to make the Act applicable to every business where any part of the profits earned in a chargeable accounting period was chargeable to income‑tax under section four sub‑section one‑b‑i, sub‑section one‑b‑ii or sub‑clause (c). The Court then reproduced the language of sections eleven paragraph one and fourteen. Section eleven paragraph one reads: “The Income‑tax Officer may, for the purposes of this Act, require any person whom he believes to be engaged in any business to which this Act applies, or to have been so engaged during any chargeable accounting period, or to be otherwise liable to pay business profits tax, to furnish within such period, not being less than forty‑five days from the date of the service of the notice, as may be specified in the notice, a return in the prescribed form and verified in the prescribed manner setting forth (along with such other particulars as may be provided for in the notice) with respect to any chargeable accounting period specified in the notice, the profits (taxable profits) of the business or the amount of deficiency, if any, available for relief under section six.” Section fourteen was quoted as follows: “If, in consequence of definite information which has come into his possession, the Income‑tax Officer discovers that profits of any chargeable accounting period chargeable to business profits tax have escaped assessment, or have been under‑assessed, or have been the subject of excessive relief, he may at any time within four years of the end of the chargeable accounting period in question serve on the person liable to such tax a notice containing all or any of the requirements which may be included in a notice under section eleven, and may proceed to assess or reassess the amount of such profits liable to business profits tax, and the provisions of this Act shall, so far as may be, apply as if the notice were a notice issued under that section.” From these provisions the Court concluded that every business to which the Act applied was exposed to the possibility of being assessed for Business Profits Tax, and it is well settled that income is said to escape assessment when the assessment process has not been started or when the process has been completed without resulting in any assessment.

In the judgment, the Court observed that a case where the assessment process concluded without any assessment was to be regarded as an instance of escaped assessment. The Court agreed with the High Court’s view that sections 11 and 14 of the Business Profits Tax Act must be read together. It noted that both the Business Profits Tax Act and the Indian Income‑Tax Act were taxation statutes that targeted the same source of revenue – namely the profits of business, which were defined in a similar manner in both statutes. Consequently, the Court held that when the provisions dealing with escaped assessment in the two statutes – section 14 of the Business Profits Tax Act and section 34(1) of the Indian Income‑Tax Act as it stood after the 1939 amendment – employed identical language, they should receive the same construction and should not be interpreted in diverging ways.

Section 34(1) of the Indian Income‑Tax Act, as amended in 1939, provided that if, as a result of definite information that came into his possession, the Income‑Tax Officer discovered that income, profits or gains chargeable to income‑tax had escaped assessment in any year, or had been under‑assessed, or had been assessed at an unduly low rate, or had been the subject of excessive relief, the Officer could, in any case where he had reason to believe that the assessee had concealed particulars of his income or had deliberately supplied inaccurate particulars, serve a notice within eight years of the end of that year; and in any other case, within four years of the end of that year. The notice could contain any of the requirements that might be included in a notice under subsection (2) of section 22, and the Officer could then proceed to assess or reassess the relevant income, profits or gains, with the provisions of the Act applying as if the notice had been issued under that subsection.

The Court explained that the phrase “escaping income” in the Indian Income‑Tax Act was to be understood to include two distinct situations: first, a situation where a notice under section 22(2) was issued but the assessment process terminated without any assessment; and second, a situation where no notice under section 22(2) was ever issued, resulting in no assessment because the process never commenced. Both situations, the Court held, represented cases of escaped assessment, whether the failure resulted from inadvertence, oversight, negligence, or any other cause that rendered the notice abortive or ineffective. The Court referred to the decision in Commissioner of Income‑tax, Bombay v. Pirojbai N. Contractor (1) and noted that the same words had been considered and interpreted in Kamal Singh v. Commissioner of Income‑tax (2), where they were understood to encompass both the absence of a notice and the issuance of a notice that led to no assessment. Justice Gajendragadkar observed that there was no justification for limiting the meaning of escaped assessment only to cases where no notice was issued.

In this matter, the Court observed that the phrase ‘escaping assessment’ should not be limited only to situations where income is unassessed because of inadvertence, oversight, or failure to file a return. The Court held that even when a return has been filed, if the Income‑tax Officer mistakenly omits a portion of assessable income from tax, that omitted portion is also characterised as income that has escaped assessment. Consequently, the appellant’s attempt to impose a narrowly defined, artificial restriction on the meaning of ‘escape’ in section 34(1)(b) could not be upheld. The passage containing this view had previously been quoted with approval in Maharajadhiraj Sir Kameshwar Singh v. State of Bihar (1) (per Hidayatullah, J.). In Chatturam Horilram Ltd. v. Commissioner of Income‑tax (2) the Court dealt with a different factual scenario where assessment proceedings were initiated but failed to produce a valid assessment due to a defect not attributable to the Assessing Authorities; the Court classified that situation as chargeable income escaping assessment rather than merely a non‑assessment of tax. These authorities demonstrate that the expression ‘escaping assessment’ applies equally to cases where the assessee receives a notice that results in no assessment and to cases where, for any reason, no notice is issued and consequently no assessment occurs. The Court further noted that section 14 of the Act mirrors the language of section 34(1) and, by virtue of the provisions of section 11, any notice issued under section 14 obliges the Income‑tax Officer to proceed as if the notice were issued under section 11. Accordingly, any benefit or relief available to the assessee under section 11, such as allowable deductions or deficiency provisions, must also be available when a notice is issued under section 14. Since the legislature has deliberately employed the wording of section 34(1) in section 14, the construction given by the courts to section 34(1) should be read onto section 14. It was submitted that a different meaning should be assigned in the present case because, although the words ‘escaping assessment’ appear in both sections, the language of section 11(1) and section 22(2) differs; in section 11 the notice requires the assessee to file a return for the previous year, whereas in section 22(2) the notice requires furnishing particulars for any chargeable accounting period of the business.

Section 2(2) of the Act defined “accounting period” for any business as the period that had been determined to be the previous year for the purpose of the Indian Income‑tax Act. Section 2(4) then defined “chargeable accounting period” in two parts: first, any accounting period that fell wholly within the term beginning on 1 April 1946 and ending on 31 March 1947; second, where an accounting period straddled the said term, only the portion of that period that fell inside the term was to be treated as a chargeable accounting period. Consequently, when the previous year corresponded to the financial year 1946‑47, the accounting period and the chargeable accounting period coincided, both covering the entire year 1946‑47. However, if the previous year was the calendar year or the Diwali year, the chargeable accounting periods were shorter: the calendar year produced a nine‑month period from 1 April 1946 to 31 December 1946, and the Diwali year produced a seven‑month period from 1 April 1946 to 1 November 1946. The exact length of these periods depended on how the previous year was determined under the Income‑tax Act, which could be a full year or a fraction thereof. This variation explained why the legislation preferred the term “chargeable accounting period” rather than “previous year,” as it would be inaccurate to describe a period of less than twelve months as a previous year. For each of the chargeable accounting periods identified, the Business Profits Tax was to be charged, levied and paid in the financial year 1947‑48 at the rate specified in section 4 of the Act for every business falling within the ambit of section 5, and the corresponding assessment year was also the financial year 1947‑48.

The Finance Act of 1948 subsequently extended the provisions of the Act for an additional year and replaced the figure “1947” with “1948” in the definition of chargeable accounting period under section 2(4)(a). The Act also introduced a proviso stating that if an accounting period fell partly before and partly after 31 March 1947, each part would be deemed a separate chargeable accounting period. This amendment effectively split the accounting period or previous year in cases where it was not the financial year 1947‑48. As a result, the calendar year 1947 was divided into two chargeable accounting periods of three months and nine months – namely, from 1 January 1947 to 31 March 1947 and from 1 April 1947 to 31 December 1947 – and a similar division applied to a Diwali‑to‑Diwali period, producing five‑month and seven‑month chargeable periods. In practice, the entire year’s profits therefore became subject to Business Profits Tax, rather than only a portion of the year as was the situation for the financial year 1947‑48.

In the year 1947 the amendment created two separate chargeable accounting periods. The first period comprised three months running from 1 January 1947 to 31 March 1947, and the second comprised nine months running from 1 April 1947 to 31 December 1947. The same division was applied to a fiscal year measured from Diwali to the next Diwali, which was split into a five‑month segment followed by a seven‑month segment. Because of this division, the profits of the entire calendar year became subject to Business Profits Tax, whereas previously only a portion of the year’s profits had been taxed for the financial year 1947‑48. The Finance Act 1948 introduced further modifications. Section 4, together with section 10 of that Act, preserved the tax rate of sixteen and two‑thirds per cent for any chargeable accounting period that ended on or before 31 March 1947. For periods ending after that date, the rate was to be determined by the Annual Finance Act, and section 11(1) of the Finance Act fixed the new rate at ten per cent. Consequently, both Business Profits Tax rates and ordinary income‑tax rates were to be set by the Annual Finance Acts. The Finance Act 1949 extended the statute for another year and, under its section 4, fixed a rate applicable to any chargeable accounting period that ended after 31 March 1948. The Finance Act 1950, however, did not renew the statute, so the Act ceased to operate after that year except for liabilities that had already arisen or accrued. Since the tax under the Act is levied on the taxable profits of a chargeable accounting period but assessment is made with respect to the financial year in which the Act is in force, it follows that a notice concerning a chargeable accounting period must be issued in the financial year that follows the period in question.

No particular difficulty arises for accounting periods that coincide with previous‑year periods such as 1946‑47, 1947‑48 or 1945‑46, because the notice would be issued in the subsequent chargeable accounting period, which again falls within the financial year to which the Act applies. The issue, however, is how the proviso added to section 2(4) by the Finance Act 1948 alters this rule. Consider a calendar year 1946 used as an accounting period. For the financial year 1947‑48 the relevant chargeable accounting period would be the nine‑month span from 1 April 1946 to 31 December 1946. Under section 11(1) a notice concerning that period must be issued in the financial year that begins on 1 April 1947, because the tax becomes payable and assessment is made for that year, the year in which the Act came into force and remained operative. After the 1948 amendment, a calendar‑year accounting period was split into two parts, each of which became assessable in the assessment year that began on 1 April 1948. Consequently, notices for both parts had to be issued in the financial year 1948‑49. In the same manner, for the financial year 1949‑50, a notice would have to be issued in that year for the preceding chargeable accounting period.

In this case the Court observed that the argument asserting that section 11(1) of the Act contains no reference to the chargeable accounting period, unlike the explicit reference to the previous year found in section 22(2) of the Income‑tax Act, was not supported by the statutory scheme. The Court explained that the concept of a previous year or an accounting period is equally applicable to the Act as it is to the Indian Income‑tax Act, a point demonstrated by reference to the Computation of Profits Rules included in the Schedule to the Act. Those Rules relate the computation of profit directly to the accounting periods, thereby showing that the notion of a previous year is embedded within the Act through the Rules. Furthermore, the Court noted that the Rules made under the Act incorporate certain provisions of the Income‑tax Act, and that some sections of the Income‑tax Act are made applicable to the Act by virtue of section 19 as well as by the Rules themselves. Among the Rules that are applicable is Rule 8, which, inter alia, deals with allowances under section 10(2)(vi) of the Indian Income‑tax Act. The first and second provisos to Rule 8 were quoted in full: “Provided that if the buildings, machinery, plant or furniture have been used by the assessee in his business for not less than two months during the previous year, the percentage shall be increased proportionately according to the number of complete months of use by the assessee; Provided further that in the case of a seasonal factory worked by the assessee during all the working seasons of the previous year, the percentage shall be increased as if the buildings, machinery, plant, or furniture had been in use throughout the period the assessee was the owner thereof during the previous year.” Both of these provisos employ the expression “previous year,” which the Court identified as being synonymous with the accounting year under the Act. The Court further referred to Rule 4(A) of the Rules made under the Act, which adapts certain sections of the Indian Income‑tax Act with specific modifications; among those adapted sections is section 50 of the Income‑tax Act. In the Act, section 50 has been replaced by the following provision: “No claim to any refund of tax under the Act shall be allowed unless it is made within four years from the last day of the financial year commencing next after the expiry of the accounting period which constitutes or includes the chargeable accounting period in respect of which the claim to such refund arises.” By drawing attention to these provisions, the Court concluded that the two statutes – the Act and the Indian Income‑tax Act – must be read together, and that the notion of a previous year has been expressly introduced into the Act. The modified section 50, as incorporated into the Act by the Rules, therefore means that a refund, if any, may be granted only if the claim is filed within four years of the financial year that begins after the accounting period has ended, where that accounting period itself forms or contains the chargeable accounting period for which the refund is sought. Consequently, the Court indicated that the statutory framework requires the chargeable accounting period to be linked to the timing of notice and refund claims, and that any interpretation excluding this link would be inconsistent with the language and purpose of the relevant Rules and sections. If the

The Court observed that if the appellant’s view were accepted, section fifty would become completely ineffective in situations where an assessment was levied, for instance, ten years after the end of the chargeable accounting period, because no method of calculation could permit a claim for refund of tax under that provision in such a case. This observation provided the key to determining the time within which a notice under section eleven‑one must be issued. The Court held that the notice had to be served within the financial year that began immediately after the expiration of the accounting period, or within the preceding year that either was that financial year or included the chargeable accounting period in question. The Court further stated that section forty‑eight of the Income‑tax Act, as amended and applied to the Act, did not disturb the operation of section fifty, since the two sections required a joint reading and the assessee was required to apply for a refund within the period specified by section fifty, citing Adam Haji Dawood & Co. Ltd. v. Commissioner of Income‑tax, Burma (1). Regarding section fourteen, the Court noted that the language, especially the words “may proceed to assess or reassess the amount of such profits to Business Profits Tax,” supported the respondent’s contention that the provision applied to cases where no assessment was made because a notice had not been issued, as well as to cases where an assessment was attempted after a notice but the proceedings proved ineffective. The Court explained that the terms “assess” and “reassess” did not convey the same meaning; “assess” related to situations where there was no assessment due to the absence of a notice and the process had to commence with the issuance of such notice, whereas “reassess” related to situations where the assessment process was revived by issuing a second notice after the first notice had been abortive or had resulted in under‑assessment. By construing the provision in this manner, the Court gave effect to the expression “profits of any chargeable accounting period … have escaped assessment” and avoided the inconsistency that some cases of non‑assessment could be dealt with under section fourteen with a time limit, while other clearly analogous cases of non‑assessment fell under section eleven‑one without any temporal limitation. The Court warned that accepting the appellant’s contention would place the discretion of the Income‑tax Officer in deciding which of the two sections to apply, leading to the absurd result that where there was definitive information that profits had escaped assessment a four‑year limitation would apply, whereas where only a belief existed there would be no limitation. Consequently, the Court concluded that if the words “profits escaping assessment” were read to apply both to original assessments, where the assessment process had never begun, and to assessments where the process had begun but proved wholly or partially abortive, then section fourteen would rightly apply to both categories.

Section II was held to apply to ordinary original assessments, whereas Section 14 applied to profits that escaped assessment as defined earlier, irrespective of whether the assessment in question was an original assessment or a re‑assessment. In order to ascertain the reach of Section 14 of the Income‑Tax Act, reference could appropriately be made to another statute that dealt with the same subject matter, namely the Excess Profits Tax Act of 1940 (Act XV of 1940). Sections 13 and 15 of that Act contain language that is identical to Sections 11 and 14 respectively of the Income‑Tax Act. Section 13 of the Excess Profits Tax Act governs the issuance of a notice for assessment, while Section 15 deals with the situation of profits that have escaped assessment.

Prior to the amendment effected by the Income Tax and Excess Profits Tax (Amendment) Act, 1947 (Act 22 of 1947), Section 15 of the Excess Profits Tax Act prescribed a limitation period of five years, expressed in the words “within five years of the end of the chargeable accounting period in question”. The 1947 amendment expressly removed those words, thereby abolishing the five‑year limitation that had previously applied. The Income‑Tax Act of 1947 (Act 21 of 1947) and the amendment Act were enacted in close succession, essentially at the same time. By removing the time limit in the Excess Profits Tax legislation, the legislature intended to make profits that escaped assessment liable to tax without any limitation period. At the same time, however, the legislature chose to retain a four‑year limitation period in Section 14 of the Income‑Tax Act. This dual approach cannot be described as purposeless; the contention that the four‑year limitation in Section 14 was deliberately inserted to prevent the taxation of profits that had escaped assessment for more than four years from the end of the relevant chargeable accounting period is therefore supported by substance.

The appellant argued that, when read according to the plain meaning of its words, Section 11(1) applied only to original assessments, while Section 14 applied to cases where a notice had been issued but, for any reason, the proceedings failed to result in an assessment or resulted only in an under‑assessment. The appellant relied on the wording “require any person whom he believes to be engaged in any business or to have been engaged during any chargeable accounting period or to be otherwise liable” and submitted that this language permitted an Income‑Tax Officer, if he held such a belief concerning a person’s engagement in business during the relevant accounting period, to issue a notice at any time, without any temporal restriction, compelling the person to file a return and comply with the assessment process.

To support this position, counsel for the appellant cited two authorities. The first was Gokuldas Ratanji Mandavia v. Commissioner of Income‑Tax (1), an appeal originating from East Africa. The second was Telu Ram Jain & Co. v. Commissioner of Income‑Tax (2), a decision of the Punjab High Court. In the East African case, a notice had been served on the assessee under Section 59(1) of the East African Income Tax (Management) Act, 1952.

The Commissioner, under the East African Income Tax (Management) Act of 1952, was empowered by section 59(1) to issue a written notice requiring any person to furnish, within a reasonable period not less than thirty days from the service of the notice, a return of income. Section 71(1) provided that the commissioner shall proceed to assess every person chargeable with tax as soon as may be after the expiration of the time allowed to such person for the delivery of his return. Section 72 stated that where it appears to the commissioner that any person liable to tax has not been assessed, the commissioner may assess that person at such amount as, according to his judgment, ought to have been charged. In the case before the Privy Council a notice was issued requiring the assessee to file returns for the years of assessment 1943‑53, but no return was filed. Consequently, the commissioner made assessments for the years 1943‑51 under section 72 of the East African Act. The assessee argued that section 72 could not be invoked until the machinery under section 71 had been operated, contending that the assessments were ultra vires and void because they were made before the time allowed by section 71 had elapsed.

The Privy Council held that section 71 applied to all original assessments, while section 72 dealt with the reopening of cases that had been settled through the normal procedure. Accepting the assessee’s contention, Lord Somervell of Harrow observed that if the power to make an assessment under section 72 were limited to original assessments, the Lords could not imply a term restricting it to back cases or deem it ultra vires to operate at any time. He explained that one would expect an opportunity to make a return to be a condition precedent to assessment, a view supported by the provisions for personal allowances in Part VI of the Act. He warned that allowing assessment without such an opportunity would create two concurrent jurisdictions: one offering reasonable protection to the taxpayer and the other offering none, apart from a right of appeal. Such a construction contradicted the mandatory provisions of section 71, which governs how all original assessments are to be made. The language of sections 59(1), 71 and 72 therefore differed from that of sections 11 and 14 of the Act. Section 72 was held not to apply because it would produce the undesirable dual jurisdiction. The Privy Council concluded that the words of section 72 must be restricted to cases where the machinery of section 59(1) had been operated and no assessment resulted. In contrast, the words of section 14 were entirely different, applying to cases of profits escaping assessment, and the phrase “escaping assessment” had been interpreted under section 34 of the Income‑tax Act, ensuring consistent meaning across statutes.

In this case, the Court observed that the expression had already been interpreted under section 34 of the Income‑tax Act and there was no reason for the same words appearing in a statute that is of comparable material to be given a different meaning in the two Acts. The Court further noted that the difficulty which the Privy Council had perceived, namely that two jurisdictions might exist—one affording protection to the assessee and the other denying such protection—did not arise here. This was because the assessment procedure under section 14 of the Business Profits Tax Act is identical to the procedure that operates when a notice is issued under section 11(1) of the same Act. Consequently, any advantage that an assessee would enjoy under section 11(1) is equally available under section 14. The Court then referred to the Punjab case, which concerned the Excess Profits Tax Act. It explained that the removal of the limitation clause in section 15 of that Act meant that assessments were not subject to any limitation period. The Court also observed, although not essential to the decision, that the language of section 13 of that Act was broad. It found no merit in the argument that, after the assessment period, a notice could be issued only under section 15 and not under section 13. Applying the construction placed on section 14 of the Business Profits Tax Act, the Court held that the phrase “profits escaping assessment” refers to situations where a notice has been issued but no assessment results. The Court also said that the phrase covers situations where, because of inadvertence, oversight, or other circumstances, no notice is issued. In view of that construction, the Court found it difficult to interpret section 11 in the way the appellant had contended. The Court concluded that the assessment sought to be made was beyond the jurisdiction of the assessment authority and that the appeal must therefore fail. Accordingly, the appeal was dismissed with costs.

The appeal was filed by the Commissioner of Income‑tax, Bombay, against the judgment and order of the High Court of Bombay dated 5 September 1956. That judgment had been certified under section 19 of the Business Profits Tax Act, 1947, read with section 66(1) of the Indian Income‑tax Act, 1922. The respondents were the firm of Narsee Nagsee and Co., Bombay, which carried on business in Bombay at all material times. For the chargeable accounting period 13 November 1947 to 31 October 1948, the Income‑tax Officer issued a notice on 12 January 1953 under section 11(1) of the Act. The notice required the firm to file its return. The notice was served on the firm on 21 January 1953. The firm filed a return under protest, asserting that the notice was invalid under section 14 of the Act. It may be noted that the income‑tax assessment for the same year had been completed on

The assessment for the chargeable accounting period that ran from 13 November 1947 to 31 October 1948 was completed on 17 February 1953. The Income‑Tax Officer rejected the assessee firm’s objection and finalized the assessment under section 12(1) of the Business Profits Tax Act on 30 November 1953. The firm then appealed to the Appellate Assistant Commissioner, who upheld the firm’s objection, holding that the notice was invalid under section 14(1) of the Act. The Commissioner of Income‑Tax, Bombay, appealed this decision, and the Appellate Tribunal affirmed the view of the Appellate Assistant Commissioner. However, at the Commissioner’s request, the Tribunal framed two specific questions for determination by the Bombay High Court. The first question asked whether the Income‑Tax Officer had the authority to assess the firm under the Business Profits Tax Act by issuing a notice under section 11(1) on 12 January 1953 for the accounting period ending 31 October 1948, without first invoking section 14 of the Act. The second question sought to know, if the answer to the first was negative, whether the assessment could nonetheless be considered valid. The High Court altered the first question by removing its final twelve words, and thereafter answered both questions in the negative. Following this, the Commissioner obtained a certificate from the High Court and filed the present appeal. Before addressing the reasons given by the High Court and the Tribunal and the arguments raised in this appeal, the Court found it useful to reproduce sections 11(1) and 14 of the Act. Section 11(1) authorises the Income‑Tax Officer, when he believes a person is engaged in a business liable to tax, to require that person to submit a return within at least forty‑five days of service of a notice, specifying the chargeable accounting period and the taxable profits, and allowing the officer to extend the deadline at his discretion. Section 14 provides that if, based on definite information, the Officer discovers that profits for any chargeable accounting period have escaped assessment, have been under‑assessed, or have received excessive relief, he may, within four years of the end of that period, serve a notice containing any required requirements and may then assess or reassess the tax as if the notice were issued under section 11.

The tribunal explained that, according to section 11, the income‑tax officer was authorised to issue a notice, to assess or reassess the amount of profits that were liable to business‑profits tax, and that the remaining provisions of the Act should be applied to such notice as if it had been issued under the authority of section 11 itself. The tribunal then read sections 11 and 14 together and expressed the view that a notice issued under section 11 for a particular chargeable accounting period had to be served before the beginning of the next chargeable accounting period. The tribunal further held that if such a notice was not served in time, the profits for that period must be treated as having “escaped assessment,” and that any remedial action could be taken only under section 14 and only within four years of the close of the accounting period to which the assessment sought to apply. Applying this principle, the tribunal observed that the notice in the present case had been served in January 1953, which was more than four years after the termination of the chargeable accounting period on 31 October 1948. Consequently, the tribunal concluded that both the notice and the subsequent assessment were barred by the statutory time limit. The tribunal also pointed out that the legislature’s intention could be inferred from the fact that, although section 15 of the Excess Profits Tax Act had its five‑year limitation removed by Act 22 of 1947, a corresponding amendment was not made to section 14 of the present Act—section 14 being the counterpart of section 15 of the Excess Profits Tax Act— even though both Acts were enacted simultaneously as Act 21 of 1947. Accordingly, the tribunal reasoned that profits which had never been brought under assessment and therefore had not been taxed at all must be deemed to have “escaped assessment” because the required notice under section 11 had not been issued within the appropriate time, and that any action to tax those profits could be taken only under the time limits prescribed in section 14. By contrast, the Bombay High Court did not accept the tribunal’s view that a notice under section 11 had to be issued before the end of the chargeable accounting period. The High Court held that the two sections must be read together and observed that section 11 contains no express time limit for issuing a notice. The Court questioned whether it would be proper to import into section 11 the temporal considerations that led the legislature to fix a four‑year limitation for issuing notices under section 14. The Court warned that refusing to do so would lead to an anomalous result: while the legislature sought to protect taxpayers from harassment concerning “escaped assessment” or under‑assessment, it would nevertheless permit harassment in relation to the very initiation of proceedings after the four‑year period had expired. The Court therefore suggested that the four‑year period mentioned in section 14 provides a significant indication of the limitation that should apply to the issuance of a notice under section 11, particularly where income that has escaped assessment can be taxed only within that four‑year window.

The Court observed that if section 14 limits the period for assessing escaped income to four years, it must be inferred that the escape of income occurs at some time before the expiry of that four‑year period. The most important fact in the present case, the Court noted, is that the notice in question was served four years after the close of the chargeable accounting period. Because that notice was issued after the time prescribed in section 14, the Court held that, in its view, the notice could not be considered a valid notice under section 11. The Commissioner argued that section 11 governs the issuance of a notice for the first time before any income has been returned or brought to tax, and that the notice contemplated by section 11 is not subject to any time limit. According to the Commissioner, a limitation cannot be implied into a statutory provision when the legislature deliberately chose not to include one. The Commissioner further maintained that section 14 deals with “escaped assessment” and, under the scheme of the Act, should be given a narrow meaning – namely the escape of profits from tax, wholly or partly, for any reason after the assessment process has already taken place. It was contended that section 14 operates only after one set of assessment proceedings has been completed and applies solely where profits have escaped assessment, have been under‑assessed, or where excessive relief has been granted. By contrast, the Commissioner said, section 11 applies to all cases in which the assessee has not been called upon to file a return or has failed to file one voluntarily. The assessee, relying on the reasoning of the Tribunal and the High Court, responded that while section 14 requires the Income‑Tax Officer to possess definite information before issuing a notice, section 11 merely requires the Officer to be satisfied that business was carried on during the chargeable accounting period, allowing the notice to be served. Consequently, the assessee argued that the Income‑Tax Officer could disregard section 14 altogether and issue a notice under section 11 even after a considerable lapse of time. The Commissioner further submitted that the liability to pay tax arises under section 4 of the Act and continues until the tax is actually paid, and that the legislature deliberately left the Income‑Tax Officer with the power to assess tax where no assessment proceedings have been initiated, without imposing any temporal restriction. In contrast, section 14 was framed to protect persons whose profits have already been assessed from being subjected to a double jeopardy, except within the period specified therein. Accordingly, the two sections must be read together and reconciled. The learned Chief Justice of the Bombay High Court, who delivered the judgment of the Bench, observed that this reconciliation was not an

The judge observed that it was not a simple task to assign a rational meaning to the two competing provisions. He, however, concluded that the contention raised by the assessee firm represented the more reasonable interpretation. Accordingly, where two conceivable constructions existed—one that was strict and another that was advantageous to the assessee—the judge preferred the latter, provided that it was equally reasonable.

The court then explained that the scheme of the Business Profits Tax Act, as far as the requirement to file a return is concerned, differed entirely from the scheme of the Indian Income‑tax Act. Under the Indian Income‑tax Act a general notice was issued inviting every assessee whose income exceeded the exempt minimum to file a return within the time specified in that notice. In addition, the Income‑tax Officer possessed the power to issue a special notice to any individual assessee during any assessment year, requiring a return of his income for the preceding year. Consequently, an assessee under the Income‑tax Act was bound to file a return whenever his income was taxable, whether the return was filed in response to the general notice or to a special notice. The assessee could also elect to file a return voluntarily before receiving any special notice.

The court noted that even before 1939, although a general notice did not exist, the distinction between the previous year and the assessment year was recognized. A notice issued under section 22 of the Indian Income‑tax Act had to be served before the close of the assessment year and could not be issued after that date.

In contrast, the court described the scheme of the Business Profits Tax Act as different. Business profits were assessed in the same manner as income‑tax, and taxes were payable for any chargeable accounting period in which the assessee had carried on business and had earned assessable profits. Under the Business Profits Tax Act, if the Income‑tax Officer had reason to believe that the assessee was engaged in a business to which the Act applied, or had been so engaged during any chargeable accounting period, or was otherwise liable to pay business profits tax, the officer could require the assessee to furnish a return. This power was embodied in section 11.

The court then turned to section 14, which provided that if, based on definite information, the Income‑tax Officer discovered that profits of any chargeable accounting period liable to business profits tax had “escaped assessment,” the officer could, at any time within four years after the end of that chargeable accounting period, serve a notice on the person liable to tax. The court emphasized that there was no obligation to file a return except in answer to a notice issued under either section 11 or section 14, and that the Act did not contain any period comparable to the assessment year.

Finally, the court addressed the argument advanced by Mr. Palkhivala, who sought to import the concept of an “assessment year” into the Business Profits Tax Act by suggesting that the next chargeable accounting period could be treated as the assessment year for the preceding chargeable accounting period. When the court pointed out that, for example, a business whose chargeable accounting period ended on March … the argument could not be sustained.

In the proceedings, the Tribunal observed that each year the final chargeable accounting period would be compressed to a period of fifteen days, yet it could not furnish a satisfactory answer to the objection raised. The Tribunal further declared that the chargeable accounting year was identical with the “assessment year”. The Court held that this statement could not be correct because section 11(1) of the Act expressly refers to both the current chargeable accounting period and to earlier chargeable accounting periods, a point that will be explained in detail later. Consequently, the court identified the principal issue as whether the phrase “profits which have escaped assessment” should be given a narrow construction, meaning only those profits that were sought to be assessed after a prior notice under section 11 but subsequently escaped assessment, or a broader construction, encompassing profits that were never subjected to assessment because no notice under section 11 was ever issued. This issue is essentially a question of construction of the two relevant sections of the Act, and before resolving it the court considered the overall scheme of several basic provisions of the statute.

The Act equates the “accounting period” for its purposes with the previous fiscal year of a business as defined in the Indian Income‑Tax Act, 1922. Tax is imposed on the taxable profits arising in a “chargeable accounting period”, which is defined as an accounting period that falls entirely within the term beginning on 1 April 1946 and ending on 31 March 1949, or, if an accounting period straddles that term, only the portion that lies within the term is treated as chargeable. A proviso adds that when an accounting period extends both before and after 31 March 1947, the portion before that date and the portion after it shall each be treated as separate chargeable accounting periods. Section 4, the charging provision, (excluding the exemption clauses which are not relevant here) provides that, subject to the Act, every business to which the Act applies shall be charged, levied and shall pay a “business profits tax” on the amount of taxable profits for each chargeable accounting period. For any chargeable accounting period ending on or before 31 March 1947, the tax rate is fixed at sixteen and two‑thirds percent of the taxable profits; for periods beginning after that date, the rate is to be determined by the annual Finance Act. Section 5, concerning the application of the Act, (again omitting non‑pertinent provisos) states that the Act applies to every business in which any part of the profits earned during a chargeable accounting period is liable to income‑tax under the specified sub‑clauses of the Indian Income‑Tax Act, 1922.

The Court observed that the provisions of section 4 of the Indian Income‑tax Act, 1922, and the relevant clause of the sub‑section, make it clear that the business profits tax is intended to follow the imposition of income‑tax. In other words, a profit becomes assessable to the business profits tax only after it has become assessable to income‑tax. The tax is levied on the taxable profits that accrue during a specified period, and that period may encompass up to four accounting periods, each of which may correspond wholly or partly to the previous year as defined under the Income‑tax Act. Consequently, the liability to pay business profits tax is conditioned on the existence of a liability to pay income‑tax, although the reverse is not true; a business that pays income‑tax is not automatically liable to pay the business profits tax. The Act, however, does not contain a provision that defines a period comparable to the “assessment year” used in the Indian Income‑tax Act, nor does it prescribe any time‑limit within which an assessment of the business profits tax must be completed. The short question therefore presented itself: whether a limitation period analogous to the one in section 14 should be read into section 11 of the Act. The Court noted that all parties conceded, and no argument was made before it, that if section 11 is read in its plain terms, no such limitation can be implied. Nevertheless, both the Tribunal and the High Court had relied on section 14 to supply such a limitation. The Court warned that it is a serious matter to read into a statutory provision words that the legislature chose not to include. Referring to the judgment of Lord Esher, M.B., in Curtis v. Stovin, the Court quoted that it is “very easy for a judge to say that he is introducing words into an Act only by way of construing it, while he is really making a new Act.” Such an approach is inappropriate when the language of the section does not permit any extension. The Court emphasized that the correct question is not what the legislature might have intended, but what the legislature actually said. This caution is especially important in statutes that impose a tax, because the tax cannot be altered or removed except for the clearest and most compelling reasons. Having recalled these principles, which have been repeatedly recognised, the Court turned to the matter before it.

Under the scheme of the Act as analysed, the Court found that the liability to tax does not depend on any subsequent action taken under the Act to recover the tax; instead, the liability attaches automatically to the taxable profits at the moment those profits are earned in any chargeable accounting period. Once this liability has attached, it can be extinguished only in two ways: either by the payment of the tax or by the tax becoming unenforceable because the prescribed period for levy has expired. The Commissioner of Income‑Tax argued that, in the case of a business that has not been brought to tax, the liability to pay the business profits tax does not cease merely because time has passed; rather, it continues until the tax is actually paid or the statutory period for levy lapses. The Court noted that this contention would mean that the liability would persist indefinitely unless the tax were paid or the statutory limitation period ended, a position that raised significant questions about the interpretation of the relevant statutory provisions.

The Court observed that once an attempt at assessment has been made, the provisions of section 14 prevent the revenue authority from initiating fresh proceedings after four years have elapsed from the close of the chargeable accounting period. The Commissioner argued that the expression “profits have escaped assessment” in section 14 should be confined strictly to situations that fall within that limited temporal scope. To support this view, the Commissioner relied upon a recent Privy Council decision involving an African taxpayer, cited as Gokuldas Ratanji Mandavia v. Commissioner of Income Tax (1). The judgment of that case was discussed in detail. In the matter before the Privy Council, the income‑tax officials in Nairobi wrote to the taxpayer on 26 May 1953, requesting both information and a security deposit of £2,000. Their letter stated that the taxpayer had never filed a return of total income nor claimed any allowances, and therefore the officials were forwarding, under separate cover, assessment forms covering the years 1943 to 1953. The taxpayer was instructed to complete those forms and return them together with details of his professional earnings and property transactions as previously described. At that time the taxpayer, Mandavia, was residing in England and on 4 June he replied, asking that the deadline be extended to the end of July. On 15 June 1953 the Regional Commissioner sent another notice informing Mandavia that assessments and penalties would be imposed based on the information already submitted. The assessments were formally made on 18 June but were dated 26 June, apparently to give the taxpayer additional time to satisfy the liability.

The Court then referred to the statutory framework applicable in the East African case. Section 59 of the East African Income Tax (Management) Act, 1952, provided that the Commissioner could, by written notice, require any person to furnish a return of income and any other particulars necessary for the purposes of the Act within a reasonable period not less than thirty days from the service of the notice. The third subsection imposed a duty on every person to notify the Commissioner, before 15 October in the year following the year of income, that he was chargeable, where no notice under subsection (1) had been served and no return had been filed within nine months after the close of the accounting year. The Court noted that the Act subsequently contained sections 71 and 72, which dealt with the mechanics of assessment. Section 71, inter alia, required the Commissioner to proceed with assessment of any person chargeable with tax as soon as practicable after the expiry of the time allowed for filing the return. Sub‑sections (2) and (3) of that section dealt respectively with cases where a return had been filed and either accepted or rejected, and with cases where no return had been filed at all. Section 72, omitting its proviso, provided that where it appeared to the Commissioner that any person liable to tax had either not been assessed or had been assessed for a lesser amount than should have been charged, the Commissioner could make an assessment or additional assessment within the year of income or within seven years after its expiry, subject to the usual procedural safeguards of notice, appeal and other provisions of the Act.

The provision in section 72 declared that where a person had either not been assessed at all or had been assessed at an amount lower than what ought to have been charged, the Commissioner was empowered to make a fresh assessment of that person within the year of income or, if necessary, within seven years after the expiration of that year. The Commissioner could assess the correct amount or any additional amount that, in his judgment, should have been charged, and the Act’s rules governing notice of assessment, appeals and other related proceedings were to apply to such an assessment or additional assessment and to the tax thereby charged.

In the case being examined, the Commissioner attempted to rely on section 72 to justify the assessments that had been made. He contended that the assessments were not ultra vires or void merely because they were issued before the statutory “time allowed” had elapsed. The Commissioner argued that the general wording of section 72 was wide enough to encompass even a situation where a person had not been assessed, irrespective of whether that person had received a notice and the prescribed “time allowed” under sections 59 and 71.

The taxpayer, on the other hand, argued that section 72 was intended only for cases in which new information led either to a fresh assessment after an earlier assessment or to an additional assessment. The taxpayer maintained that the provision did not apply to circumstances where the mechanism of section 59(1) – the requirement to serve a notice and allow the prescribed time for filing a return – had never been employed.

The Privy Council accepted the taxpayer’s contention. It held that before any assessment could lawfully be made, the statutory “time allowed” under section 59(1) had to first expire. However, the Council gave a narrow interpretation to the phrase “assessing for the first time” in section 72, limiting it to cases where the machinery of section 59(1) had been operated but no assessment had yet been made. The Lords set out three reasons for this view, expressed in their own words:

“If the power to make an assessment under section 72 were to apply to the making of an original assessment, the Lords were unable to imply a term restricting it to back cases or to deem it ultra vires to operate it at any time. One would expect an opportunity to make a return to be a condition precedent to assessment. This expectation is supported by the provisions for personal allowances in Part VI of the Act. If the respondent’s position were correct, any person could be assessed without having any such opportunity. This would create two concurrent jurisdictions, one providing reasonable protection for the taxpayer and the other offering no protection with respect to the original assessment, apart from a right of appeal. Such a construction seemed inconsistent with the general and mandatory provisions of section 71.”

The Lords further observed that section 71 set out the procedure for all original assessments, whereas section 72 dealt, inter alia, with additional assessments and with cases where, presumably because of later information, the Revenue wished to reopen matters that had otherwise been settled under the normal procedure. In light of the wording of section 71, the Lords concluded that it was necessary to restrict the words “assessing for the first time” in section 72 to those situations where the statutory machinery of section 59(1) had already been triggered but no assessment had yet been made.

The Court observed that section 72 applied only to situations in which the mechanism prescribed in section 59(1) had been invoked but no assessment had consequently been made. For the taxpayer, once a return had been filed or the opportunity to file had been provided, the tax liability for that year was considered settled and the taxpayer was regarded as having no outstanding tax obligation. If later information came to the Revenue’s notice, the Revenue could reopen the case and decide that an assessment should now be made. Thus, section 72 dealt with the reopening of cases that had been concluded through the ordinary assessment process. This interpretation explained why section 72 imposed an apparent statutory limitation of seven years, whereas section 71 contained no such time limit. The Court found the respondents’ contention that this limitation was inexplicable to be unconvincing. It was more reasonable to accept that, after a certain period, the reopening of a matter that had already been settled should be barred unless fraud or willful default could be shown. The construction was further supported by the repeated use of the phrase “ought to have been charged” in section 72, where the expression applied both to “such amount” and to “such additional amount”. The Court noted that although a cited case involving the African Act could be distinguished on the ground that the two statutes were not of equal material, it nevertheless illustrated how the language of a statute and the overall tax scheme might require a narrowed meaning for seemingly general terms. When a claim is based on a particular statute, that statute alone must guide the interpretation, not an unrelated one. Additionally, the decision under review could be differentiated because a notice under section 59(1) was still pending and the prescribed time for filing had not yet elapsed. The assessee also relied on a Bombay High Court decision in Commissioner of Income‑tax v P N Contractor, where the assessment year ended on 31 March 1934 and no notice under section 22(2) had been issued during that year. A notice under section 34 was later served on 26 June 1935. The Bombay High Court, through Beaumont C.J. and Rangnekar J., held that section 34 was sufficiently wide to cover cases where no notice under section 22 had been issued or where a first assessment was absent. Beaumont C.J. dissented from Sir George Rankin’s obiter comments in Lachhiram Basantlal, clarifying that income could be said to have escaped assessment only when an assessment had been made that failed to include the income. He further explained that under section 34, what must be escaped is the entire assessment process, which, for individuals, commences with the service of a notice under section 22(2). Consequently, the liability to be assessed was a risk to which every person entitled to income in British India was subject.

The Court observed that the process of assessment is escaped in the same way by a person who never receives a notice under section 22(2) as by a person who does receive such a notice but the notice proves ineffective in practice. In the Court’s view, a person who does not receive a notice under section 22(2) has, through no fault of his own, escaped assessment because the assessment procedure was never initiated for him. The assessee then relied upon the decision of Commissioner of Income‑tax, Burma v. Ved Nath Singh, in which the Court of Appeal, through the observations of Roberts, C.J., Mya Bu and Dunkley, JJ., held that section 34 applies to two situations: first, where no assessment at all has been made against the person who earned the income, profits or gains liable to tax; and second, where an assessment has been made during the year but some portion of the income, profits or gains has been omitted from the assessment order for any reason. The omitted portion, according to that judgment, constitutes income that “escaped assessment” for the year and therefore falls within the scope of section 34. Those cases were decided before the 1939 amendments, at a time when there was no general provision comparable to the present‑day notice issued under section 22(1). Even then, the income‑tax return required the taxpayer to supply details of the total income earned in the preceding year. Consequently, at the close of an assessment year it was not possible to issue a notice covering a period earlier than the previous year. By operation of section 22(2) it could be said that, at the end of any assessment year, the income of the corresponding previous year had escaped assessment. The logical implication of this rule was that if no notice calling for a return under section 22 was issued within the assessment year, the only mechanism to levy tax on such escaped income was section 34, as illustrated in Rajendra Nath Mukerjee v. Commissioner of Income‑tax. The present Indian Income‑tax Act, however, is arranged differently. By imposing a specific time limit for issuing a notice under section 22(2), the Act makes clear that the expression “escaped assessment” in section 34, on its face, embraces all instances of escaped assessment, whether or not a prior assessment has taken place. Under the Act, the assessment “escapes” when the assessment year ends. Therefore, the earlier cases interpreting section 34 of the older Income‑tax Act are not applicable. The cases cited by the assessee also fail to assist; for example, in Kamal Singh v. Commissioner of Income‑tax, the Court held that the word “information” was broad enough to include knowledge of the correct state of the law and that the term “escaped” was sufficiently wide to cover situations of inadvertence or oversight by the assessing authority.

The Court observed that the earlier authorities dealt with situations of oversight or neglect by the assessing officers. In the decision of Commissioner of Income‑tax v. Ranchhoddas Karsondas, the respondent had filed a voluntary return indicating that there was no taxable income, and the Court held that the Income‑tax Officer could not disregard that return and subsequently invoke section 34 of the Income‑tax Act. In the case of Maharajadhiraj Sir Kameshwar Singh v. State of Bihar, the income reported in the return was not taxed, and later an assessment was attempted under section 26 of the Bihar Agricultural Income‑tax Act, 1938. The Court found that section 26 covered such a circumstance and that the wording of that provision was extremely wide. The Court considered these decisions to be of little relevance to the present matter.

Consequently, the Court returned to the task of construing the two provisions in question, emphasizing the need to determine the effect of the language employed and the overall scheme of the enactments. Before undertaking that analysis, the Court addressed an ancillary consideration advanced by both the Tribunal and the High Court. The Court noted that the Act under consideration had followed the Excess Profits Tax Act, 1940, which imposed a tax on excess profits earned during chargeable accounting periods that began on 1 September 1939 and ended on 31 March 1941. Subsequent Finance Acts extended the applicable year to 1942, 1943, 1944, 1945 and 1946, after which the present Act was enacted. Sections 13 and 15 of the Excess Profits Tax Act corresponded respectively to sections 11 and 14 of the present Act, the only difference being that section 15 contained a five‑year limitation.

The Court explained that Act 21 of 1947, which preceded the present Act, removed that limitation by deleting retrospectively the words “within five years of the end of the chargeable accounting period in question” from section 15 of the Excess Profits Tax Act. As a result, there was no longer any time limit for bringing to tax profits that had escaped assessment, a point that had been affirmed by Falshaw and Kapur, JJ., in Telu Foam Jain & Co. v. Commissioner of Income‑tax. The Tribunal and the High Court argued that, had the Legislature intended to eliminate any limitation for assessing profits that had not previously been taxed, it would have been simplest to delete the analogous words from section 14 of the present Act as well. They inferred that the absence of such a change indicated that no first assessment or reassessment could be made after a lapse of four years.

The Court cautioned that this argument considered only one perspective. An alternative, equally plausible view was that the legislative purpose of amending the Excess Profits Tax Act was expressly to permit both a first assessment and a reassessment of escaped profits without any temporal restriction. By eliminating the five‑year ceiling in the predecessor legislation, Parliament evidently intended to allow assessment at any time, a purpose that should guide the interpretation of the corresponding provision in the present Act.

After the amendment, the legislature removed any time limit that had previously existed in either section 13 or section 15 of the Excess Profits Tax Act. Consequently, an assessment or a reassessment could be made at any time, even after a very long lapse. The High Court had placed great emphasis on the difficulty of requiring taxpayers to produce returns after such a long period, but that difficulty evidently did not trouble the legislature. It is therefore unreasonable to suppose that the legislature intentionally left the Act unchanged for a contrary purpose. It must also be remembered that the Act had just been enacted at that time and that the first chargeable accounting period had barely begun for any assessee. Moreover, any case of escaped assessment or under‑assessment would still have fallen within the period prescribed by section 14 of the Act. In view of these circumstances, there was no immediate need for a drastic provision such as a four‑year limitation. It may well have been thought that four years would normally be sufficient in all cases except where a particular business had never been brought within the charge of tax. In those exceptional instances, the Commissioner argued that section 11 would be adequate. The amendment of section 15 of the Excess Profits Tax Act was therefore likely intended to cover situations where, although the profits of a business had once been assessed, a further reassessment was required even if the original assessment had resulted in tax liability or no tax liability. In those circumstances, the legislature may have decided that the five‑year limitation should be removed. If this explanation of legislative intent is accepted, the reasoning offered by the High Court is not the sole possible interpretation and therefore cannot be accepted as conclusive. When legislative intent can be inferred in more than one way, it is merely speculation to declare which inference is correct. As noted earlier, it is unwise to rely on a presumed legislative purpose and to interpret statutory language in light of that presumed purpose. The true intention must be derived from the actual words of the provision in which the legislature chose to express it, and not the other way round. Accordingly, the ground advanced by the High Court is not a valid basis for its conclusion.

The High Court and the Tribunal also differed in their reading of section 11(1). The Tribunal held that a notice issued under that section had to be served before the end of the chargeable accounting period to which it related, whereas the High Court held that the notice could be issued at any time within four years after the end of that period. There is nothing in the language of section 11 that supports either of these two constructions. The provision mentions three distinct categories of persons: (a) persons who are believed to be engaged in any business; (b) persons who are believed to have been engaged in any business during a chargeable accounting period; and (c) persons who are believed to be otherwise liable to business profits tax. The wording of the statute therefore does not justify the Tribunal’s or the High Court’s narrow interpretations, and a broader reading based on the plain words of the section is required.

In this case, the Court observed that the first two categories in section 11(1) indicate different timing requirements. For the first category, the assessee must be carrying on business in the year in which the notice is issued; for the second category, the notice may be issued for a preceding “back” chargeable accounting period. The expressions “to be engaged” and “to have been so engaged during any chargeable accounting period” therefore refer respectively to current and back chargeable accounting periods. The term “any” indicates that the back period need not be the one immediately before the current period. Consequently, a notice under section 11(1) could be issued after 31 March 1949 concerning the very first chargeable accounting period. It could also be issued for each later period that falls within the interval that began on 1 April 1946 and ended on 31 March 1949. If this natural construction of the provision is accepted, and if it is reinforced by the residual class of “persons otherwise liable to pay business profits tax”, then the conclusion follows inevitably. The statute did not create a time‑limited period analogous to the assessment year used in the Income‑Tax Act. The artificial distinction between back and current chargeable accounting periods therefore disappears. Because it is impossible to state when or after what lapse of time profits might escape assessment, section 14 cannot be applied at all. Section 4 of the Act provides that for every business to which the Act applies a tax called business profits tax shall be charged, levied and paid. The liability arising under the Act can be satisfied only by paying the tax. The duties of charging and levying rest upon Income‑Tax Officers, who execute them by issuing a notice under section 11 and by assessing and demanding the tax. Accordingly, any person who is believed to be engaged in a business to which the Act applies, or to have been so engaged, or who is otherwise liable, may be required to file a return. The initiation of such proceedings does not guarantee that tax will be imposed; that is a separate question. This step represents the first operation of the Act against a potential taxpayer. It is undisputed that section 11(1) contains no express limitation on time, nor is any such limitation found elsewhere in the Act. The next issue is whether section 14 implicitly imposes a limitation. Section 14 deals with “escaped assessment”, “under‑assessment” or “excessive relief”, and its last two categories apparently refer to a subsequent assessment after an earlier one. Thus the Court considered whether the phrase “escaped assessment” also includes assessment after a prior assessment. The term “assessment” had been defined by the Judicial Committee in Commissioner of Income‑Tax v. Khemchand Ramdas, where it was explained to sometimes mean the computation of income or profits and sometimes the determination of

The Court explained that the term “assessment” could refer to the calculation of the tax due, to the determination of the amount of tax payable, or even to the entire procedure prescribed in a taxing statute for imposing liability on a taxpayer. When section 14 uses the expression “escaped assessment”, it denotes a situation in which the tax liability had been determined but certain profits did not undergo that determination, either wholly or partially. The Court observed that profits could not be said to have escaped assessment while assessment proceedings were already in progress. In the Court’s view, profits that were still subject to assessment and for which assessment had not yet been completed could not be described as having escaped assessment. Moreover, the Court highlighted that section 14 obliges the Income‑Tax Officer to possess “definite information” and to make a “discovery” of the fact that an escaped assessment has occurred before any action could be taken under that provision.

The Court went on to consider the relationship between sections 4, 11(1) and 14. It noted that if section 4 creates a tax liability without any limitation, and if section 11(1) permits enforcement of that liability without any time limit, then profits cannot be said to have escaped assessment merely because assessment proceedings are underway and not yet concluded. The Court emphasized that this case did not involve a scenario where some other limitation period would render the assessment proceedings unreachable by the tax department. As long as profits remained assessable under the charge of section 4 and were subject to the process of section 11(1), there was no “escaped assessment”. The Court further observed that there were no “back” periods beyond the reach of section 11, unlike the period prior to the previous year of the Income‑Tax Act, which is governed only by section 34. All chargeable accounting periods, the Court held, were on an equal footing, and section 11 was sufficiently broad to cover each of them. Additionally, the Court pointed out that once an assessment had been initiated, there was no statutory time limit for its completion. The Court questioned why two separate sections existed—one operating on the basis of belief and the other on definite information—if both could address profits that had never been processed and each carried a four‑year limit. It concluded that the phrase “escaped assessment” must therefore be given a narrower meaning in section 14. In light of the overall scheme of the statute and the explicit wording of section II(1), the Court found it difficult to impose a time limit, because such a limit was already embedded in section 14 for profits that escaped assessment. The Court stressed that both sections must be interpreted harmoniously, recalling the observation of Sir Lawrence Jenkins in Mohammad Sher Khan v. Seth Swami Dayal (1) that one provision should not be used to defeat another unless reconciliation is impossible. Likewise, the Court cautioned that the two sections should not be forced to operate in the same field.

The Court observed that the two provisions could not operate in the same field unless each was given a meaning that did not import implications from the other, and that the only way to distinguish separate fields was to read the provisions differently. It noted that the High Court’s construction seemed to make sections eleven and fourteen march together for the full four‑year period, a result that could not have been intended because one section relied on a belief of liability while the other required definite information leading to a positive discovery. Interpreting the provisions in this manner, the Court explained that section eleven effected assessment, levy and collection of tax from persons who were believed to be liable, whereas section fourteen permitted the reopening of cases where, after an assessment, a discovery showed that profits had escaped assessment for some reason. The expression “escaped assessment” was held to refer only to situations in which the profits of a business had been processed once but, for some reason, some profits either escaped assessment, were under‑assessed, or received excessive relief. The requirement that definite information be obtained before action could be taken under section fourteen reinforced this view. The Court defined “definite information” as that which, when discovered, demonstrates the falsity of a previous determination, while “belief” indicated merely the possibility that some profits remained taxable. Accordingly, the term “belief” in section eleven signalled that the Income‑Tax Officer must commence an initial enquiry to determine whether the business fell within the ambit of the Act. Summarising, the Court stated that although the chargeable accounting period could be aligned with the “previous year” under the Income‑Tax law, there was no mechanism to import the concept of an assessment year. To say that section eleven operated for the entire four‑year span was to describe an “assessment period,” not an assessment year. During that four‑year period, tax could be realised under section eleven because the assessment period was still open, but this left no space for section fourteen to operate, especially where it spoke of “escaped assessment.” Throughout the four‑year interval, no escaped assessment could arise, and consequently no additional time remained for section fourteen to be invoked. On this basis, the Court concluded that a meaning different from that prevailing in the Income‑Tax Act would have to be given to the same provisions.

The Court observed that the wording of sections 11 and 14 forced a construction in which the entire four‑year span would be regarded as a single “assessment period”. According to that view, the period would commence at the termination of the chargeable accounting period and would cease only after the lapse of four years, thereby encompassing every chargeable accounting period that fell within that interval. Yet the Court noted that section 14 would operate in exactly the same manner and for the same duration, which would render section 14 redundant. The Court did not consider this construction unreasonable. It recognised that the legislature might have intended to protect a person who had already been subjected to an assessment from facing a second assessment within a reasonable four‑year window after the chargeable accounting period. However, the legislature had not extended the same protection to persons who had never been assessed yet whose tax liability remained unchanged. The Court stressed that the purpose for which the limitation was introduced in one provision could not be imported by the Courts into a different provision. Accepting the High Court’s reasoning would erase the distinction between sections 11 and 14 and would defeat the purpose of the concluding words of section 14. For profits that had never been assessed, the Court explained that two different notices could arise in some cases—one under subsection (1) of section 11, which required only a belief about a certain state of affairs, and another under section 14, which required concrete information that profits had escaped assessment. These two conditions could not coexist in the same case, and a harmonious construction demanded that no impossible situation should arise. The Court therefore concluded that the operation of section 11 should be limited to cases where no prior assessment existed, while section 14 should apply only where a prior assessment had been made and an escaped assessment, under‑assessment, or excessive relief was discovered. Consequently, the four‑year limit applied to subsequent or reopened assessments, but there was no time limit for a first assessment. The Court then examined the Rules framed under the Act. It acknowledged that Rule 50 dealt with the period within which refunds could be claimed and might be read in harmony with the statute. However, if a rule could not be reconciled with the Act, the rule must fail, as explained in Maxwell on Interpretation of Statutes (10th Edn., p. 51). The Court also referred to the principles set out in Institute of Patent Agents v. Lockwood and Minister of Health v. R: Ex parte Yaffe (2). The breakdown of Rule 50 would leave Rule 48 in operation, which imposed no time limitation, thereby allowing refunds to be claimed under that rule.

The Court observed that Rule 50 was drafted without any temporal limitation, meaning that a claim for refund could be made at any time under that rule. This position was strongly supported by the fact that the provisions of Sections 48 and 50 of the Indian Income‑Tax Act were incorporated into the Excess Profits Tax Act by way of mutatis mutandis amendment. Consequently, when it had already been established that there was no limitation prescribed either by Section 13 or by Section 15 of the Excess Profits Tax Act, Section 50 had to be applied to that Act without any restriction of time. The Court further expressed the view that Rule 50 did not correspond with the underlying purpose of Section II of the Act. Even if the Court felt compelled to state this, it would have been inclined to hold that, as a rule made by the Board of Revenue, it should yield to the statutory provision, notwithstanding the fact that the rule is technically part of the Act. The Court therefore concluded that the argument attempting to limit the operation of Rule 50 on the basis of its supposed inconsistency with the spirit of the statute was without merit.

Having reached that conclusion, the Court answered the first question in the affirmative, holding that refunds could indeed be claimed without any time bar. Because that answer settled the principal issue, the second question did not require a separate determination. Accordingly, the Court would have allowed the appeal and ordered costs to be awarded both in the present proceedings and in the lower tribunal. Nevertheless, the Court recorded that, in accordance with the judgment of the majority, the appeal was dismissed with costs. The final order therefore dismissed the appeal. The decision cited the authorities (1) [1894] A.C. 347, 360 and (2) [1931] A.C. 494, 503.