Lalji Haridas vs Income-Tax Officer And Anr.

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 25 July, 1961

Coram: J.C. Shah, M. Hidayatullah, P.B. Gajendragadkar, Raghuber Dayal

The appeal before the Supreme Court concerns two brothers, Lalji Haridas and Chhotalal Haridas, each of whom filed a writ petition against the Income‑Tax Officer operating in their respective jurisdictions. The bench for this judgment comprised Justices J. C. Shah, M. Hidayatullah, P. B. Gajendragadkar and Raghuber Dayal. The first appellant, Lalji Haridas, a resident of Jamnagar, instituted Special Civil Application No. 132 of 1957 in the High Court of Judicature, Bombay, at Rajkot. In that petition he challenged the legality of notices issued to him by Income‑Tax Officer Ward A of Jamnagar under section 23(2) of the Income‑Tax Act, seeking a writ or order to restrain the officer from pursuing any further action on those notices. The High Court dismissed the petition summarily and also denied Lalji’s request for a certificate authorising an appeal to this Court. Consequently, he applied for special leave and that leave was granted, allowing him to bring the present appeal. The second brother, Chhotalal Haridas, who resides in Bombay, filed Special Civil Application No. 374 of 1960 in the High Court at Bombay. He similarly contested the validity of notices served by the Fourth Income‑Tax Officer, Ward G, and prayed for a writ restraining that officer from continuing the proceedings. The High Court again dismissed the application summarily and refused his certificate request. Chhotalal likewise obtained special leave from this Court, and his appeal now stands before the same bench.

Both writ petitions alleged that the Income‑Tax Officers intended to conduct an enquiry into a purported total income of Rs 97,00,000, which the two brothers claimed to have received either jointly or individually. The sum in question corresponded to remittances made through the Indian Overseas Bank Ltd., Pondicherry, and the United Commercial Bank Ltd., Pondicherry, and it accrued during the assessment year 1952‑53. Because each brother challenged the same set of assessment proceedings, the Court treated the two appeals as companion matters and scheduled them for joint consideration. Turning first to the appeal of Lalji Haridas, the record shows that he filed his income return for the year 1952‑53 under section 22 of the Act. Subsequently the Income‑Tax Officer, Ward B of Jamnagar, transmitted Lalji’s file to the Fourth Income‑Tax Officer, Ward G, in Bombay. Upon receipt of the file, the Bombay officer issued a summons directing Lalji to appear in person and to present his amounts in connection with the enquiry of the assessment proceedings for the year 1952‑53, pursuant to section 37 of the Act. Lalji objected to the transfer of his file and contested the jurisdiction of the Bombay officer to entertain the matter.

In this case the appellant objected to the transfer of his file from Jamnagar to Bombay and contested the jurisdiction of the Bombay officer to handle his assessment. On 30 September 1953 the Central Board of Revenue issued an order under section 5(2) of the Income‑Tax Act directing that the Commissioner of Income‑Tax (Central), Bombay, should exercise his functions with respect to persons that included the appellant. A week later, on 7 October 1953, the Commissioner, claiming authority under section 5(5) of the Act, assigned the appellant’s case to the Income‑Tax Officer, Section IV (Central), Bombay, and instructed that officer to perform all functions of an Income‑Tax Officer in respect of the assigned case. The appellant sought to persuade the Central Board to reconsider this order, but his request was denied. Consequently, he instituted Civil Suit No. 226 of 1954, seeking an injunction to restrain the Bombay Income‑Tax Officer from proceeding with the assessment on the ground that the Board’s transfer order was illegal and beyond its jurisdiction. An interim injunction was granted in that suit, which automatically stayed the Bombay officer’s proceedings.

On 21 May 1956 the Central Board cancelled its earlier transfer order, and the appellant’s file was retransferred to the Income‑Tax Officer, Ward A, Jamnagar Circle, who became the first respondent in the present proceedings. That officer issued a notice on 9 January 1957, invoking section 23(2) of the Act, directing the appellant to appear before him on 17 January 1957. The civil court, at the appellant’s request, stayed this proceeding, but the interim injunction was lifted on 1 March 1957. The first respondent then issued a second notice on 23 February 1957, fixing the hearing date as 4 March 1957. The appellant applied for an adjournment, which was refused, and on 4 March 1957 the officer passed an ex parte assessment order. The order held that the appellant was liable to tax on a total income of Rs 93,01,117 and fixed the tax payable at Rs 87,93,958‑13‑0. The appellant’s subsequent application to reopen the assessment under section 27 of the Act was dismissed.

Thereafter the appellant appealed to the Appellate Assistant Commissioner, who allowed the appellant’s appeals against both the ex parte assessment and the refusal to reopen the case. The matter was consequently remitted to the first respondent for a fresh hearing, which led to the issuance of the present notice that is now the subject of the writ petition. The validity of that notice was challenged by counsel on two grounds: first, that the assessment proceedings were barred by the limitation period prescribed in section 34(3) of the Act; and second, that the initiation of the proceedings was without jurisdiction and therefore illegal. The appellant was advised that the question of limitation should be raised before the Income‑Tax Officer, not in the writ proceedings.

In this matter the appellant contended that the assessment proceedings initiated against him were barred by the limitation period prescribed in section 34(3) of the Act and further submitted that the initiation of those proceedings was without jurisdiction and therefore illegal. The Court observed that an objection based on limitation must be raised before the Income‑tax Officer who is the proper authority to consider such a defence; it is not a matter that can be properly raised in writ proceedings. Accordingly, the Court declined to adjudicate on the limitation issue in the present writ jurisdiction. The Court indicated that, should the appellant wish to rely on the limitation defence, he may present it before the first respondent, the Income‑tax Officer, and expressed confidence that the first respondent would handle the argument in accordance with the applicable law.

The Court further examined the appellant’s challenge to the jurisdiction of the officer who was conducting the assessment. The appellant alleged that the order of transfer issued by the Central Board on 30 September 1953 was illegal and unauthorised, and consequently that the subsequent order of the Commissioner of Income‑tax (Central), Bombay, which assigned the case to the Income‑tax Officer, Section IV (Central), Bombay, was also invalid. The Court noted that the validity of the Board’s transfer order was not defended by the respondent; therefore, if that order were to be held invalid, the Commissioner’s later assignment, which was made under the authority of the Board’s order, would necessarily be void. The Court pointed out that the Commissioner of Income‑tax (Central), Bombay, would otherwise lack jurisdiction to deal with the appellant’s proceedings that originated in Jamnagar. Consequently, if the original Board order were invalid, the assignment of the appellant’s case to the Bombay officer would likewise be invalid, and the matter would properly fall within the jurisdiction of the first respondent under section 64 of the Act. The Court concluded that the appellant’s jurisdictional challenge lacked substance.

Addressing the appellant’s counsel’s further argument, the Court observed that the counsel attempted to establish that the transfer of the appellant’s assessment file for the year 1952‑53 had been validly effected by a notification. No such notification was produced in the proceedings. Throughout the case the appellant maintained that the Income‑tax Officer of Ward B, Jamnagar, had transferred the file to Bombay “without authority, illegally and without any intimation to the appellant and in contravention of section 64 of the Act.” The Court found it unnecessary to investigate the reasons for the file’s movement from Jamnagar to Bombay, as the transfer itself was manifestly invalid and unauthorised under law. Accordingly, the appellant could not successfully claim that the proceedings had been validly transferred to any Income‑tax Officer in Bombay, and the logical consequence of this finding was that the assessment proceedings remained properly pending before the first respondent.

The Court observed that the proceedings continued to lie before the first respondent and that the notice issued by that respondent was both valid and legal. Consequently, the Court concluded that the appellant’s objection concerning the jurisdiction of the first respondent lacked any substantive merit.

The matter then turned to the appeal filed by Chhotalal. The record showed that Chhotalal was a resident of Bombay and that respondent No 1 was the Fourth Income‑tax Officer, Ward G, stationed in Bombay. It was undisputed that, at the relevant time, respondent No 1 possessed jurisdiction under the statute to assess Chhotalal. An ex parte order had been passed against Chhotalal for the assessment year 1952‑53 on 30 March 1957 by the Seventh Income‑tax Officer, Ward G, Bombay, on the basis that the remittances in question represented income of the appellant derived from undisclosed business and other sources during that year. Chhotalal challenged the ex parte order by filing an appeal before the Appellate Assistant Commissioner. The appellate authority set aside the ex parte order, holding that the appellant had not been served with notice as required by law, and remitted the matter to the Income‑tax Officer for a fresh assessment. Accordingly, the impugned notice was served on the appellant under section 34 of the Act on 25 February 1959.

The principal contention advanced by counsel for the appellant, Mr Nambiar, was that respondent No 1, the Income‑tax Officer who issued the impugned notice, lacked jurisdiction to assess the appellant because the proposed assessment was, in the officer’s own view, a “precautionary” or “protective” assessment. Mr Nambiar argued that the concepts of precautionary or protective assessment were not recognised by the statute and that any attempt to levy such an assessment would be unlawful. To support this position, he relied heavily on the finding recorded against the appellant’s brother, Lalji, in the original ex parte assessment order. While that order had initially held Lalji liable for the tax on the income in question, the order had subsequently been set aside and fresh proceedings against Lalji had been instituted at Jamnagar. Mr Nambiar also pointed to an admission made by the respondent in its statement of case, asserting that the respondent appeared to concede that the assessment proposed against the appellant was merely precautionary. Specifically, paragraph 3 of the statement asserted that “steps are being taken against the appellant for taxation of income in his hands only as a precautionary measure against the eventuality of its being finally held that the income is not liable to be taxed in his brother’s hands.”

The Court observed that the respondent’s statement of case included the remark that “the appellants contention that such a procedure is not warranted under the Act is entirely untenable.” In order to gauge the effect of that remark, the Court said it was necessary to examine other relevant statements made by the respondent in the same document. For example, in paragraph 4 the respondent added that until the question of liability to pay tax on the income in dispute is finally decided, it may not be possible to safely conclude that the income belongs to one brother and not to the other. The respondent’s position, as expressed in that paragraph, was that in such a situation a protective assessment should be made so that the income does not escape taxation altogether. In other words, the respondent’s case was that the notices issued by the respective Income‑tax Officers to the two brothers were intended solely to determine which brother was responsible for paying tax on the income in question. Although counsel for the appellant, Mr. Nambiar, argued that a protective or precautionary assessment of tax was not justified by any provision of the Act, he did not seriously dispute the proposition that, at the initial stage, the tax authorities were entitled to determine through proper proceedings which person was in fact liable for the tax, and that this was precisely the step being taken at the present stage. The Court explained that when the tax authorities find that certain income was received during the relevant assessment year but it is unclear who actually received it—where it appears, on the face of it, that the income may have been received by A, by B, or by both together—it is open to the authorities to resolve the question by initiating appropriate proceedings against both A and B. Accordingly, the Court held that Mr. Nambiar could not be justified in resisting the enquiry that respondent No. 1 proposed to conduct under the impugned notice issued to the appellant. In view of these considerations, the Court declined to address the point of law that Mr. Nambiar sought to raise.

Nevertheless, the Court added a direction in fairness to the appellants. It ordered that the proceedings against both brothers should continue and be dealt with expeditiously, acknowledging that the matter was already fairly old. In the proceedings against Lalji, the Income‑tax Officer was directed to conduct a thorough enquiry and determine whether Lalji was liable to pay tax on the income in question, taking into account any objections that Lalji might raise to his alleged liability. The Court also permitted that proceedings against Chhotalal could be instituted, continued, and concluded by the Income‑tax Officer; however, it stipulated that until the proceedings against Lalji were finally resolved, no assessment order should be passed in the proceedings against Chhotalal. The Court further indicated that if the enquiry against Lalji ultimately concluded that Lalji was responsible for paying tax on the income, then it might become unnecessary to issue any order against Chhotalal.

The Court concluded that the liability to pay tax on the income under consideration rests solely with Lalji. Because Lalji was found to be the responsible party, the Court determined that there is no justification for issuing any order against Chhotalal in relation to the same tax matter. Consequently, the appeals that had been presented by the parties were rejected. Both appeals were therefore dismissed, and the Court expressly declined to make any order regarding the award of costs to either side. In summary, the judgment held Lalji accountable for the tax liability, found no need for a separate order against Chhotalal, and disposed of the appeals by dismissing them without further cost implications.