Second Additional Income-Tax Officer... vs Atmala Nagaraj And Ors.

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

Court: supreme-court

Case Number: Not extracted

Decision Date: 24 April 1962

Coram: J.C. Shah, M. Hidayatullah

The case recorded as Second Additional Income‑Tax Officer versus Atmala Nagaraj and Others was decided on 24 April 1962 by the Supreme Court of India. The judgment was authored by Justice Hidayatullah, with the bench comprising Justices J. C. Shah and M. Hidayatullah. The matter before the Court consisted of two separate appeals filed for the purpose of obtaining certificates under article 133(1)(c) of the Constitution. Both appeals were lodged by the Second Additional Income‑Tax Officer of Guntur, who challenged a common decision rendered by the High Court of Andhra Pradesh. That High Court decision arose out of two appeals that had been brought under the Letters Patent and which upheld two earlier rulings made by a learned single judge of that High Court. In those earlier rulings, the Income‑Tax Officer had been directed, by way of a writ of mandamus, not to give effect to revised assessments that had been made under section 35 of the Income‑Tax Act against the respondents. It is noteworthy that the respondents chose not to appear at the hearing before the High Court, and therefore their absence formed part of the procedural record considered by the courts at each stage.

The factual backdrop of the two appeals related to the assessment of the respondents for the assessment year 1950‑51. In Civil Appeal No. 410 of 1961 the respondent was assessed as an individual, while in Civil Appeal No. 411 of 1961 the respondent was assessed as a Hindu undivided family. In both matters the original assessment of income was completed on 22 January 1952. Each assessee held shares in two separate registered firms, and the profits attributable to those shares were initially taken to be fixed amounts and were consequently incorporated in the total assessable income of each respondent. At the time the original assessment orders were issued, the assessments of the two firms themselves had not yet been completed. Consequently, the assessment orders included a specific note indicating that action under section 35 of the Income‑Tax Act would be taken at a later date when the correct share of income could be ascertained. The firm assessments were finally completed by an order dated 16 October 1954, at which point it became clear that the combined share of income from the firms was higher for each respondent than had previously been assumed. Following the issuance of a notice under section 35, revised assessment orders were made under the same provision, and an additional tax demand was levied. Moreover, a penalty of Rs 300 was imposed under section 46(1) of the Income‑Tax Act against the respondent in Civil Appeal No. 411 of 1961. The respondents subsequently moved the High Court of Andhra Pradesh under article 226 of the Constitution, seeking relief from the revised assessments. Before the High Court, the Revenue Department justified the revised assessment by relying on sub‑section (5) of section 35, a provision that had been introduced by section 19 of the Indian Income‑Tax (Amendment) Act, 1953 (Act 25 of 1953) and that was intended to take effect from 1 April 1952. The operative chronology therefore placed the original assessment before the commencement of sub‑section (5), whereas both the assessment of the firms and the subsequent revised assessments occurred after that date. The learned single judge of the High Court erroneously concluded that the assessments of the firms had been made before 1 April 1952; it appears that the judge may have been referring instead to the original assessments of the respondents. This error formed the basis of the appeal that was ultimately brought before the Supreme Court.

In this case, the Court observed that the earlier single judge had erred in stating that the assessments of the firms were made before 1 April 1952, when in fact only the original assessments of the respondents had been made prior to that date. The Court explained that the assessments of the firms themselves had been made after 1 April 1952 and therefore could not be reopened under section 35(5) of the Income‑tax Act. The Court quoted the earlier decision in Lakshminarayana Chetty v. Income‑tax Officer, Nellore, holding that the bench had no jurisdiction to reopen assessments that were completed before the operation of section 35(5). The Court characterised the single judge’s mistake as easily explainable and clear, although counsel for the appellant had relied upon the apparently explainable error. Consequently, the Court affirmed the divisional bench’s decision that an assessment completed before 1 April 1952 could not be subjected to the provisions of section 35(5). The divisional bench had framed the real issue as follows: the Income‑tax Officer had reopened the assessments made on the partners, and the only question that arose was whether those assessments, which were made before 1 April 1952, could be reopened under section 35(5). The Court further held that the learned judges did not allow the department, for the first time before them, to argue that because the assessments of the firm were made after 1 April 1952, section 35(5) would apply to them. The question of how far section 35(5) was retrospective and whether it would apply to original assessments completed before 1 April 1952 was no longer a pure question of law. Referring to S.K. Habibullah’s case, the Court noted that section 35(1) empowered the tax authorities to rectify mistakes that were apparent from the record of the assessee within four years of the assessment order, but a mistake not apparent from that record could not be deemed apparent from another record, such as the firm’s record. The Court approved the earlier decision of Subba Rao C.J. in Kanumarlapudi Lakshminarayana Chetty v. First Additional Income‑tax Officer, Nellore, in which the learned Chief Justice observed that such a mistake was “not a mistake apparent from the record but a mistake discovered from the disposal of another case.” Regarding subsection (5), the Court explained that the fiction introduced by that provision was not a matter of excessive caution but was intended to fill a lacuna. Subsection (5) deemed a certain mistake not apparent from the assessee’s record to be apparent, thereby providing a different limitation period; however, the power could not be exercised where the assessment of a firm had been completed before 1 April 1952, even if the rectification of a partner’s assessment was made after that date. Counsel for the department argued that the assessment of the partners had been made on 22 January 1952 and could therefore be rectified under subsection (1) within four years, and that such rectification had been carried out after subsection (5) came into force. The Court rejected this argument, noting that the case had never been raised under subsection (1) in the High Court, and that a new point could not be introduced for the first time at this stage. Accordingly, the matter was rested on the application of subsection (5) in the High Court.

In considering the effect of sub‑section (5) the Court observed that the High Court had applied the provision in the case of S K Habibullah, where both the partners’ assessments and the firms’ assessments were completed before 1 April 1952. In that case the amended provision was held not to apply. The present matter involved an original assessment that had been made before the amendment came into force. The Court explained that the amendment could not be made applicable to that original assessment, even though the assessment of the firms was completed after 1 April 1952. The respondents’ assessment was a final assessment made before 1 April 1952, and sub‑section (5) had not been extended to such assessments either expressly or by implication. The provision was given a limited retrospective effect only from 1 April 1952, and the Court reiterated the earlier decision that courts could not extend its retrospective operation beyond that date. Consequently, the party could rely only on the law as it stood before the introduction of sub‑section (5), as already determined by the Court. The record of the firms’ assessment could not be invoked to demonstrate an error in the partners’ assessment. Moreover, the Court reiterated the holding in S K Habibullah that sub‑section (5) was not merely procedural but affected the vested rights of an assessee. Accordingly, the Court concluded that sub‑section (5) could not be employed in the present case and that the High Court’s decision was correct.

The final argument raised was that the partners’ assessment was provisional, citing a note that action under section 35 would be taken when the firms’ assessments were completed. The Court found that, despite the remark in the order, the assessment was final and not a provisional assessment under section 23B of the Act, nor was it described as such. Because it was a final assessment, it could be rectified only under the law that existed at the time, which did not contain the fiction created by sub‑section (5). That fiction, when enacted, could not be applied to cases that had been finally closed before 1 April 1952. The only alternative remedy would have been rectification under sub‑section (1), but that provision was inapplicable because there was no error apparent from the partners’ assessment records. Furthermore, sub‑section (1) had not been relied upon by the High Court and therefore could not be invoked at this stage. For these reasons the Court held that the appeals failed and dismissed both appeals.