Commissioner Of Income-Tax, Madras vs S. Raman Chettiar

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 1096 of 1963

Decision Date: 27 October 1964

Coram: S.M. Sikri, Subbarao, K. Shah, J.C. Shah

In the matter titled Commissioner of Income‑Tax, Madras versus S. Raman Chettiar, the Supreme Court delivered its judgment on 27 October 1964. The opinion was authored by Justice S. M. Sikri, with Judges Subbarao and J. C. Shah sitting on the bench. The case was reported in 1965 AIR 1031 and 1965 SCR (1) 883, and it has subsequently been cited in numerous decisions including D 1969 SC 496, APL 1969 SC 831, D 1974 SC 1985, R 1986 SC 1853, among others. The dispute concerned the interpretation of sections 22(3) and 34 of the Indian Income‑Tax Act (Eleventh Amendment) of 1922, specifically the validity of a notice issued under section 34 and the effect of a return filed by the assessee under section 22(3).

The factual backdrop involved a notice dated 3 April 1948 issued to the assessee under section 34, requiring submission of returns for the assessment years 1944‑45 and 1945‑46. The assessee complied and filed the returns for both years. The Income‑Tax Officer subsequently abandoned the proceedings for the year 1944‑45 while completing the assessment for 1945‑46. Dissatisfied, the assessee first appealed to the Appellate Assistant Commissioner and then to the Appellate Tribunal. The Tribunal allowed the appeal in part, holding that a portion of the profit determined for 1945‑46 should be assessable to the year 1944‑45, and it observed that the Income‑Tax Officer retained the discretion to take appropriate action. Thereafter, relying on the amendment enacted by Act 48 of 1948—passed on 8 September 1948 but made retrospective to 30 March 1948—the Officer obtained the Commissioner’s sanction as required and issued a fresh notice under section 34 concerning the year 1944‑45. The amount that the Tribunal had identified as profit for that year was then brought to tax. The assessee’s subsequent appeals to the Appellate Assistant Commissioner and the Tribunal were dismissed. On a reference, the Madras High Court held in favour of the assessee, concluding that the reassessment for 1944‑45 under section 34 was invalid. The Commissioner of Income‑Tax appealed this decision to the Supreme Court.

The Supreme Court held that the first return filed by the assessee constituted a valid return under section 22(3). Consequently, the tax department could not disregard that return and issue a notice under section 34 on the premise that the assessee had omitted or failed to file a return under section 22. Section 22(3) permits an assessee to furnish a return at any time before the assessment is made, that is, before the deadline specified in section 34(3). The return need not be a voluntary filing in the sense of being initiated suo motu by the assessee. Even if the initial notice under section 34 was defective because the Commissioner’s sanction was not obtained as required by the 1948 amendment, that defect did not render the subsequent return filed in response to the notice invalid. The Court clarified that any return that is otherwise valid and filed before the receipt of a proper notice under section 34 must be treated as a valid return within the meaning of section 22(3). This reasoning affirmed the validity of the assessee’s original filing and precluded the department from treating the matter as an omission warranting reassessment.

In the course of its analysis, the Court referred to earlier authorities, noting that Commissioner of Income‑tax, Bihar and Orissa v. Maharaja Pratap Singh Bahadur of Gidhaur (1961) 41 ITR 421 was distinguished, that Commissioner of Income‑tax, Bombay City v. Ranchoddas Karsondas (1959) 36 ITR 569 was cited for guidance, and that R K Das & Co. v. Commissioner of Income‑tax, West Bengal (1956) 30 ITR 439 was expressly overruled. The matter before the Court arose from Civil Appeal No 1096 of 1963, which had been taken by special leave from a judgment of the Madras High Court dated 3 January 1961 in Case Referred No 114 of 1956. Counsel for the appellant appeared on behalf of the appellant, while counsel for the respondent appeared for the respondent. The judgment was delivered by Justice Sikri. The appeal challenged the Madras High Court’s conclusion that a reassessment made under section 34 of the Indian Income‑tax Act, 1922, and completed on 30 June 1953 for the assessment year 1944‑45, was invalid. The Court set out the material facts. The respondent, identified as the assessee, was a Hindu undivided family. During the assessment years 1944‑45 and 1945‑46 the assessee did not file any returns under section 22 of the Act, and no notices had been issued under section 22(2). On 3 April 1948 the Income‑Tax Officer issued notices under section 34 for both years, at a time when the law did not require prior sanction of the Commissioner of Income‑tax, and consequently none was obtained. The assessee subsequently filed a return for 1944‑45 on 4 September 1948, declaring income of Rs 4,053, which fell below the Hindu undivided family taxable threshold of Rs 7,200, and also filed a return for 1945‑46. The Income‑Tax Officer appears to have abandoned the proceedings for 1944‑45 as futile, but for 1945‑46 he issued an order on 27 October 1950 determining a net taxable income of Rs 1,20,603. The assessee then appealed to the Appellate Assistant Commissioner and thereafter to the Appellate Tribunal. On 19 November 1952 the Tribunal allowed the appeal in part, holding that from a total profit of Rs 79,760 arising from the sale of certain properties, Rs 33,000 was assessable to the year 1945‑46 and Rs 46,760 was assessable to the year 1944‑45. The Tribunal observed that “the Income‑Tax Officer is at liberty to take such action as he may be advised about the assessee’s liability for the earlier year 1944‑45.” After obtaining the Commissioner’s sanction, the Income‑Tax Officer issued, on 27 February 1953, a notice purportedly under section 34 of the Act concerning the assessment year 1944‑45. The validity of that notice is the issue presently before the Court. The Officer subsequently passed an order on 30 June 1953 assessing the total income.

In the case at hand, the Income Tax Officer issued an assessment that fixed the total income at Rs 51,523. The Appellate Assistant Commissioner confirmed that assessment and held that the Officer’s initiation of proceedings under section 34(1)(a) was lawful. He further observed that, because the Appellate Tribunal had previously found that the Officer was free to take action concerning the assessee’s tax liability for the 1944‑45 assessment year, the second proviso to subsection (3) of section 34, as amended by the 1953 Amendment Act, applied. Consequently, the time‑limit prescribed in section 34 was not applicable to the present proceedings. The Appellate Tribunal, without deciding whether section 34(1)(a) could be invoked by the Revenue, likewise affirmed the assessment on the ground that the second proviso to section 34(3), as amended, was applicable.

At the instance of the assessee, the Appellate Tribunal referred the question that opened the judgment to the High Court, which had answered it in the negative. The High Court ruled that, although the return filed by the assessee on 4 September 1948 resulted from an invalid notice, the return itself could not be ignored or set aside by the Department. The Court further held that the Department could not issue another notice under section 34(1)(a) on the basis that the assessee had omitted or failed to file a return required by section 22. In reaching this conclusion, the Court applied the ratio of the decision in Commissioner of Income‑Tax v. Ranchhodas Karsondas. Counsel for the appellant submitted that the return was not voluntary, that it was made pursuant to an invalid notice and therefore must be treated as invalid, and that no assessment could be based on it. He also argued that the precedent of Ranchhodas Karsondas was distinguishable. Counsel for the assessee objected to the introduction of this new point at that stage, pointing out that the statement of the case filed on behalf of the appellant contained a proposition of law stating: “The notice issued on 3 April 1948 and return filed on 4 September 1948 being valid, the proceedings thus initiated came to an end on 27 October 1950, and there were no proceedings pending when the second notice was issued on 27 February 1953.” This proposition, he contended, admitted the validity of the return. On the merits, he supported the High Court’s reasoning and added that, in his view, the assessment could have been made by the Income Tax Officer up to 31 March 1949 under section 23, treating the return as one made under section 22. He further observed that the appellant was not raising any new point, noting that although the appellant’s statement elsewhere claimed the return was not voluntary, the earlier proposition nonetheless acknowledged its validity.

In this case the appellant first asserted that the notice issued on 3 April 1948 was valid. However, elsewhere in the statement of the case the appellant claimed that the return filed on 4 September 1948 was not a voluntary return and therefore could not be treated as a return on which a valid assessment could be made. The appellant further argued that the situation was one in which no return had been filed and income had escaped assessment, so that clause (a) of section 34(1) applied and the second notice issued under section 34 was given within the period permitted by law. The core question that therefore arose was whether the return dated 4 September 1948 could be regarded as a valid return under section 22(3) of the Act. Section 22(3) reads: “If any person has not furnished a return within the time allowed by or under sub‑section (1) or sub‑section (2), or having furnished a return under either of those sub‑sections, discovers any omission or wrong statement therein, he may furnish a return or a revised return, as the case may be, at any time before the assessment is made.” This provision allows an assessee to file a return at any time prior to the making of an assessment. By virtue of section 34(3), as it stood in 1949, an assessment could have been made at least up to 31 March 1949, provided the return was valid. Consequently, it may be inferred, as held in Santosha Nadar v. First Additional Income‑Tax Officer, Tuticorin and Commissioner of Income‑Tax Bombay City II v. Bhagwandas Amersey, that a return must be filed before the date specified in section 34(3). That condition was satisfied in the present case. Mr Sastri submitted that section 22(3) implicitly requires a return to be voluntary. The Court could not accept the proposition that every return made under section 22(3) must be a voluntary return in the sense of being filed of the assessee’s own motion without any notice.

The Court observed that if a return is filed in response to a general notice under section 22(1) or a special notice under section 22(2), the return is still voluntary, although not filed suo motu. It is a return filed in compliance with a public or special notice. Where no return is filed in response to notices under sections 22(1) and 22(2), the Act imposes certain penalties. It is therefore inaccurate first to describe a return made under section 22(3) in response to a notice under section 22(1) or 22(2) as voluntary, and then to claim that a return made in response to a notice under section 34 is not voluntary merely because the notice warns the assessee that some income has escaped assessment. In the Court’s view, both categories of returns fall under section 22(3) of the Act. In the first category the return is made directly under section 22(3); in the second category, a notice under section 34 is treated as a notice under section 22(2), and the return is consequently deemed a return under section 22(3). From the language of section 22(3), the Court could not conclude that the return dated 4 September 1948 fell outside the scope of that provision. Mr Sastri, however, argued that this Court had adopted a contrary approach in Commissioner of Income‑Tax Bihar and Orissa v. Maharaja Pratap Singh Bahadur of Gidhaur. The Court therefore proceeded to examine the decision in that earlier case.

In the present matter the Court held that a notice issued under section 34 is to be treated as a notice issued under section 22(2) and that the return filed in response to such a notice is consequently a return made under section 22(3). Accordingly, the Court could not conclude that the return dated 4 September 1948 fell outside the scope of section 22(3). Counsel for the respondent, Mr Sastri, argued that this Court had adopted an opposite view in the earlier decision of Commissioner of Income‑Tax, Bihar and Orissa v Maharaja Pratap Singh Bahadur of Gidhaur. The Court therefore examined the reasoning in that precedent. In the earlier case the Maharaja had derived agricultural income and had also received interest on arrears of rent for the assessment years 1944‑45 through 1947‑48. The tax authorities had excluded the interest from his assessable income on the basis that it was agricultural, a position later rejected by the Privy Council. The Income‑Tax Officer issued notices under section 34 on 8 August 1948 without first obtaining the Commissioner’s approval. Section 34 had been amended by the Income‑Tax Business Profits Tax (Amendment) Act, 1948 (Act XLVIII of 1948). Assessments were subsequently made on the basis of notices dated 3 August 1948. The matter was referred to the High Court for determination of whether, under those circumstances, the assessment proceedings had been lawfully initiated under section 34 of the Indian Income‑Tax Act. The Supreme Court held that the Amending Act had not only repealed the original section 34 on the date of its enactment but had retroactively repealed it from 30 March 1948 and replaced it with a reenacted provision containing a proviso. The Act expressly provided that this reenacted section was to be deemed to have come into force retrospectively from 30 March 1948, thereby excluding the operation of section 6 of the General Clauses Act. Consequently, at the time the notices were issued on 8 August 1948 a statutory requirement existed obliging the Income‑Tax Officer to record his reasons and to obtain the Commissioner’s prior approval before issuing a notice under section 34, unless such approval had been secured. Because the Officer issued the notices without complying with the proviso to the reenacted section 34(1), the Court declared those notices invalid and held that the entire reassessment process was illegal. While the reference before the High Court focused on the validity of the assessment proceedings, the Supreme Court’s decision did not directly address the validity of the returns themselves. Nevertheless, Mr Sastri cited observations made by both the Patna High Court and this Court, wherein counsel had argued that it was physically impossible for the Officer to satisfy the amended requirements of section 34 on the date the notices were issued. The High Court acknowledged the argument as correct but noted that the tax department was not prejudiced because the notices could be reissued after the amendment became effective on 30 September 1948, provided the new procedural requirements were fulfilled. The Supreme Court, on appeal, affirmed that fresh notices could have been issued and questioned why the original notices had not been withdrawn and replaced. These observations indicate that the Court assumed the possibility of issuing new notices in the earlier case, a point on which Mr Sastri relied, although the earlier judgment did not expressly discuss the validity of the return filed under section 22(3).

On 8 August 1948, the High Court addressed the argument that the Income Tax Department could not be said to have suffered prejudice because notices issued under section 34 might be reissued after the 8th of September, the date on which the Amending Act took effect, provided that the department complied with the requirements of the amended section 34. The High Court acknowledged that the argument was correct, but held that the department’s position was not prejudiced by the procedural defect. The Supreme Court, while hearing the appeal against that decision, first declared the notices to be invalid. The Court then observed that there was ample time for the issuance of fresh notices and expressed puzzlement as to why the original notices had not been withdrawn and new ones issued. These observations revealed that the Supreme Court assumed that the department could and should have issued fresh notices in the circumstances. Counsel for Mr Sastri submitted that the department had indeed acted in the manner that the Supreme Court had indicated should have been taken. Apart from the absence of any discussion in the record concerning the validity of the return itself, it was nevertheless possible to conclude that, based on the facts of that case, fresh notices could have been issued without difficulty.

In the earlier case of Maharajah Pratap Singh, the appellant had filed returns for four assessment years, namely 1944‑45 through 1947‑48, under section 22, and assessments were made. However, the income attributable to interest on arrears of rent was omitted from the assessment. Because the Maharajah had already filed returns and was not attempting to revise them, the returns filed in response to a notice under section 34 could not be treated as returns under section 22(3). By contrast, in the present case the assessee had never filed a return under section 22; the first return he submitted was made in response to a notice under section 34. The Court noted that the assessee could have filed that return even without a notice, as the four‑year period prescribed by section 34(3) had not expired. The Court also referred to the decision in Commissioner of Income‑tax, Bombay City v. Ranchhoddas Karsondas, where it was held that a return showing income below the taxable limit was a valid return and that the Income Tax Officer could not simply disregard such a return by issuing a notice under section 34. Justice Hidayatullah, speaking for the Court, remarked that it was difficult to understand how a return, once filed, could be ignored. Nevertheless, the Court found that the Ranchhoddas decision did not directly resolve whether the return in the present matter qualified as a “good return” within section 22(3). Mr Sastri further argued that if the notice under section 34 were declared bad, then the return filed pursuant to that notice should also be treated as bad. The Court was satisfied that this contention lacked substance. Although the Calcutta High Court decision in R K Das & Co. v. Commissioner of Income‑Tax, West Bengal supported Mr Sastri’s position, the Court respectfully disagreed with the reasoning employed by that High Court.

The Court observed the decision of the High Court. The Court noted that it had not approved the decision rendered in Ranchhoddas Karsondas's case, which had been issued by the High Court. Consequently, it could not accept the contention that an assessment based on treating the return as one filed under section 22(3) would be satisfactory. The Court believed that such an assessment would fail even a cursory scrutiny because it lacked proper basis. We think that some confusion has crept into this branch of the Income Tax Law by the use of the words ‘voluntary return’ and ‘non‑voluntary return’. Section 22(3) does not employ those expressions, and irrespective of the motive or cause, a return that is otherwise valid must be considered. If such a return is filed before the assessee receives a valid notice under section 34, it is to be treated as a return within section 22(3). In the result we agree with the High Court that the question referred to it must be answered in the negative. Accordingly, the Court dismissed the appeal and ordered that the costs be awarded to the respondent in this proceeding. The appeal was consequently dismissed, thereby confirming the Court’s order and concluding the proceedings on all issues raised. The Court cited the authorities (1) [1960] 1 S.C.R. 114 and (2) [1956] 30 I.T.R. 439 as relevant precedents.