The First Additional Income-Tax Officer, Mysore vs H.N.S. Iyengar

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 60 of 1961

Decision Date: 5 October 1961

Coram: J.L. Kapur, S.K. Das, J.R. Mudholkar

In this case the petitioner was the First Additional Income‑Tax Officer of Mysore and the respondent was H N S Iyengar; the judgment was delivered on 5 October 1961 by a bench of Justice J L Kapur, Justice S K Das and Justice J R Mudholkar of the Supreme Court of India. The citation for this decision is 1962 AIR 478 and 1962 SCR Supl. (1) 1. The matters addressed involved provisions of the Indian Income‑Tax Act of 1922, specifically sections 22(1) and 34(1)(a), as well as the Indian Finance Act of 1948. In the year 1956 the Income‑Tax Officer issued a notice to the respondent under section 34(1)(a), requiring him to file a return on the basis that his income for the year ending 31 March 1949 had escaped assessment. The respondent argued that the notice could not be issued because eight years had elapsed since the close of the relevant accounting year, and he therefore filed an application under article 226 of the Constitution challenging the notice. The High Court examined the phrase “any year” in section 34(1)(a) and concluded that it referred to the accounting year rather than the assessment year, and consequently held the notice to be invalid. The Income‑Tax Officer appealed this decision, contending that “any year” should be interpreted as meaning the assessment year. The Supreme Court held that the proper construction of section 34(1)(a), read together with the Finance Act 1948, is that the words “for any year” denote any assessment year and not any accounting year, because assessment is always made for the assessment year even though it relates to income accrued in the preceding accounting year. The Court further observed that although the previous year may differ for various heads of income under different sections of the Income‑Tax Act, this does not create separate limitation periods for different sources of income. The Court relied upon the authorities in Panna Lal Nand Lal Bhandari v Commissioner of Income Tax, Bombay City [1961] 2 SCR 35 and C W Spencer v Income‑Tax Officer, Madras [1957] 31 ITR 107. The case was a civil appeal numbered 60 of 1961, arising from the judgment and order dated 15 September 1958 of the Mysore High Court in Bangalore, which had been issued in Writ Petition 144 of 1957. Counsel for the appellant were K N Rajagopal Sastri and P D Menon; counsel for the respondent were Rameshwar Nath, S N Andley and P L Vohra. The appeal was filed under article 133(1)(c) of the Constitution, challenging the High Court’s order made under article 226.

The case was instituted under the authority of the Constitution of India. The appellant was the First Additional Income‑Tax Officer, while the respondent was the assessee whose liability was being examined. The dispute concerned the assessment year 1948‑49, which was linked to the accounting year 1947‑48. The officer had acted under section 34(1)(a) of the Income‑Tax Act, which authorises the officer to require a taxpayer to file a return when income is believed to have escaped assessment. The notice issued by the officer sought to compel the respondent to file a return for the year that ended 31 March 1949, alleging that his income for that period had not been assessed. The purpose of the notice was to enable the officer to assess any income, profits or gains that might have escaped assessment, been under‑assessed, or been subject to excessive relief. The statutory framework provided that the officer could serve such a notice within a period of eight years from the end of the relevant accounting year. The central question was whether the reference to ‘any year’ in the provision should be interpreted as the accounting year or the assessment year. The interpretation of that phrase formed the basis of the present appeal.

On 27 November 1956 the officer dispatched the notice invoking section 34(1)(a) and demanded that the respondent file the required return. Two days later, on 29 November 1956, the notice was formally served upon the respondent, thereby satisfying the procedural requirement for service. The respondent immediately raised an objection, contending that the notice could not be issued because more than eight years had passed since the close of the accounting year to which the alleged assessment related. The tax authority examined the objection and rejected it, maintaining that the eight‑year limitation did not bar the issuance of the notice. Dissatisfied with the refusal, the respondent filed a writ petition on 12 June 1957 in the High Court of Mysore, invoking article 226 of the Constitution and seeking a certiorari to annul the officer’s order. The High Court examined the construction of section 34 and concluded that the expression ‘any year’ appearing in section 31(1)(a) referred to the accounting year rather than to the assessment year. That construction formed the subject of the appeal before the Supreme Court.

The Court then reproduced the full wording of section 34(1)(a) to clarify the statutory language that was under consideration. The provision read as follows: “If‑ (a) the Income‑tax officer has reason to believe that by reason of the omission or failure on the part of an assessee to make, a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year income, profits or gains chargeable to income‑tax have escaped assessment for that year, or have been under‑ assessed, or assessed at too low a date, or have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has been computed, or (b) ……. he may in cases falling under clause (a) at any time within eight years serve on the assessee, or if the assessee is a company on the principal officer thereof, a notice containing all or any of the requirement which may be included in a notice under sub‑ section (2) of section 22 and may proceed to assess or re‑assess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so for as may be, apply accordingly as if the notice were a notice issued under that sub‑section;”. The provision therefore empowered the officer, upon reasonable belief of omission or under‑assessment, to serve a notice within eight years and to reassess the income concerned.

The appellant argued that the phrase ‘any year’ appearing in clause (a) must be read as referring to the assessment year, because the Income‑Tax Act assesses the income of the preceding financial year in the subsequent assessment year. To support this interpretation, reliance was placed on other provisions of the statute, notably section 3, which is the charging provision dealing with the year to which tax is levied. Section 3 provides that where any Central Act enacts that income‑tax shall be charged for any year at the rates specified, the tax is to be imposed for that year on the total income of the previous year of each person or entity. The text of section 3 as printed in the Act reads: “Where any (Central Act) enacts that income‑tax shall be charged for any year at”. The dispute therefore centered on whether the statutory reference to ‘any year’ in section 34(1)(a) should be construed in the same sense as in section 3, i.e., as the assessment year, or whether it should be understood as the accounting year. That question formed the core issue for determination on appeal. The Court therefore needed to interpret the statutory language in the context of the entire Act.

Section 3 of the Income‑Tax Act provides that any rate or rates of tax which have been fixed in a Central Act shall be charged for that year in accordance with, and subject to, the provisions of the Income‑Tax Act as they apply to the total income of the preceding year of every individual, Hindu undivided family, company, local authority, firm, other association of persons, the partners of a firm or the members of an association taken individually. This wording demonstrates that income‑tax is levied for “any year” at the rates laid down in a Central Act, the reference in the present case being to the Indian Finance Act of 1948, formally known as Act XX of 1948. Section 9 of that Finance Act states that, subject to sub‑sections (3) to (6), for the year beginning on 1 April 1948, income‑tax shall be charged at the rates specified in Part I of the Second Schedule to the Act, and then proceeds to describe the manner of making assessments for the year ending on 31 March 1949. From this provision it is evident that, according to the Finance Act 1948, tax for the year beginning 1 April 1948 was to be calculated at the rates contained in the attached schedule, while the assessment itself was to be made for the year ending 31 March 1949 under the provisions of sub‑sections (2) and (3). Consequently, the Finance Act required that an assessment for the year ending 31 March 1949 be carried out using the rates specified for the year beginning 1 April 1948. Turning to Section 22(1) of the Income‑Tax Act, the provision obligates the Income‑Tax Officer, before 1 May each year, to give a notice—published in the press and in the prescribed manner—requiring every person whose total income during the preceding year exceeded the maximum amount not chargeable to tax to furnish, within a period of less than sixty days as specified in the notice, a return in the prescribed form. The return must set out, together with any other particulars demanded, the person’s total income and total worldwide income for that year. This requirement shows that a return must be filed for the assessment year with reference to the total income earned in the preceding accounting year. Accordingly, when Section 34(1)(a) mandates that a return be filed, the return must be made under Section 22 for “any year,” and when the statute speaks of the omission of filing a return under Section 22 for “any year,” the term “any year” refers to the assessment year, even though the income disclosed relates to the prior accounting year.

The Court observed that the reference in clause (a) of sub‑section (1) to paragraph B of section 22 of the Act makes the phrase “for any year” applicable to an assessment year. The provision therefore requires an assessee to furnish a full and true disclosure of all material necessary for the assessment of that year, which necessarily means the assessment year. The Court considered it erroneous to suggest that a return under section 22 of the assessee’s income for any year would carry a different meaning in the first part of the provision from the part dealing with the full and true disclosure of material facts needed for the assessment of that year.

With due respect to the learned Judges of the High Court who rendered the earlier decision, the Court held that the view taken by those judges regarding the meaning of “any year” was incorrect. The correct interpretation of section 34(1)(a) is that the words “for any year” refer to any assessment year and not to any accounting year, because, as previously explained, the assessment is made for the assessment year although it concerns income that accrued in the previous year. The Court further noted that the previous year may differ for different heads of income falling under various sections of the Indian Income‑Tax Act, and it could not have been the Legislature’s intention to create different limitation periods for different sources of income.

Having read the various sections of the Indian Income‑Tax Act quoted above together with the provisions of the Indian Finance Act 1948, the Court found that the words “that year” in section 31(1)(a) refer to the assessment year and not to the accounting year. The Court’s attention was then drawn to a judgment of this Court in Pannalal Nandlal Bhandari v. Commissioner of Income Tax, Bombay City. In that case it was held that once a notice is issued in the prescribed manner under section 22(1) of the Income‑Tax Act, every person whose income exceeds the maximum amount exempt from tax is obliged to submit a return, and failure to do so is deemed an omission within the meaning of section 34(1)(a). Although the specific question was not raised in that case, the Court observed that the notices had been issued within eight years from the end of the years of assessment and that, if clause (1)(a) of section 34 were applied, the assessment would not be barred by the law of limitation.

The Court also cited a passage from page 79 of the same judgment, stating that “the appellant, not having submitted a return in pursuance of the notice issued under section 22(1), the Income‑Tax officer was competent under section 34(1)(a) to issue a notice at any time within eight years of the end of the year of assessment for assessing him to tax.” The citation of the case is (1961) 2 S.C.R. 35. The appellant also relied

The Court considered the precedent set in C.W. Spencer versus Income‑Tax Officer, Madras, reported in (1) [1957] 31 I.T.R.107. That case expressed that the limitation period must be measured from the end of the relevant year, whether it is eight years under section 34(1)(a) or four years under section 34(1)(b). Although section 34 does not expressly define the term “year”, the context of the provision makes clear that the word refers to the assessment year. The provision does not intend to refer to the accounting year, which the Act elsewhere identifies as the previous year. Accordingly, the Court held that the interpretation given by the Madras High Court in the Spencer case is the correct one. By contrast, the view advanced by the learned judges of the Mysore High Court was found to be mistaken. Consequently, this appeal was allowed and the judgment and order of the High Court that had set aside the proceedings against the respondent were reversed. The respondent was ordered to pay the costs of the appeal both in this Court and in the High Court. Accordingly, the Court concluded that the appeal should be allowed, confirming the reversal of the earlier order and the liability for costs.