Commissioner of Income Tax, New Delhi vs Rao Thakur Narayan Singh

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 954 of 1963

Decision Date: 30 October 1964

Coram: Subba Rao, J.C. Shah, S.M. Sikri

In this case, the Supreme Court recorded that the petitioner was the Commissioner of Income‑Tax for New Delhi and the respondent was Rao Thakur Narayan Singh, with the judgment delivered on 30 October 1964. The bench consisted of Justice Subbarao, Justice K. Shah, Justice J. C. Sikri and Justice S. M. The case was reported in 1965 AIR 1421 and 1965 SCR (1) 990, and cited later in D 1973 SC 254 (6). The dispute involved the provisions of the Income‑Tax Act, 1922 (Eleventh Amendment), specifically section 34(1), which allows assessment of income that escaped earlier assessment.

The Income‑Tax Officer issued a notice to the assessee under section 34, asserting that two items of income – forest income and interest income – had been omitted from the original assessment for the year 1942‑43. The assessee filed a return that fully disclosed the interest income but contended that the forest income was not taxable. Despite the respondent’s claim, the Income‑Tax Officer assessed both items and demanded tax on them.

The respondent appealed the assessment, and the Appellate Tribunal issued an order on 25 April 1961. The Tribunal examined only the forest income and concluded that the Income‑Tax Officer lacked jurisdiction to commence proceedings under section 34 in relation to that income. However, by mistake, the Tribunal set aside the entire reassessment order, covering both the forest income and the interest income, even though it had not addressed the latter.

The Department did not employ the remedy provided in section 35 to rectify the Tribunal’s mistake, nor did it refer the question of illegality to the High Court. After the Tribunal’s order became final, the Income‑Tax Officer started fresh proceedings under section 34 concerning the interest income and issued a revised assessment that incorporated this income. The Tribunal later confirmed the revised assessment.

Subsequently, the High Court, on a reference made under section 66(1), held that fresh proceedings under section 24 could not be initiated because the Tribunal’s order dated 25 April 1949 had become final. The Supreme Court held that the Tribunal had indeed erred in setting aside the reassessment of the interest income, but the Income‑Tax Officer failed to use the obvious remedy of rectification under section 35, allowing the Tribunal’s order to stand as final. Accordingly, the officer could not reopen the assessment by invoking section 34, as doing so would grant the officer an unchecked power of review that could override the findings of tribunals and courts. The Court cited C.I.T. Bombay and Aden v. Khemchand Ramdas (1938) 6 I.T.R. 414 and C.I.T. West Punjab v. The Tribune Trust, Lahore (1948) 16 I.T.R. 214 as authorities supporting this principle.

The Court noted that this was a civil appeal filed under special leave, identified as Civil Appeal No. 954 of 1963, arising from the judgment and decree dated 9 March 1964 of the Allahabad High Court in Income‑tax Miscellaneous Case No. 143 of 1954. Counsel for the appellant comprised K N Rajagopala Sastri, R H Dhebar and R N Sachthey, while counsel for the respondent included A V Viswanatha Sastri, Z S Meeratwal, B P Singh and Naunit Lal. The judgment was delivered by Subba Rao J. The appeal challenged a decision of a Division Bench of the Allahabad High Court which had held that the Income‑tax Officer erred in commencing proceedings under section 34(1) of the Indian Income‑tax Act, 1922 (hereinafter “the Act”) in respect of the assessment year 1942‑43.

The factual background was that the assessee possessed an indivisible estate situated in the district of Ajmer. On 25 March 1944 the Income‑tax Officer made an assessment of tax for the year 1942‑43. Subsequently, on 5 April 1945, the Officer issued a notice under section 34 of the Act on the basis that two components of the assessee’s income – namely the income derived from a forest and the interest income – had been omitted from the original assessment. In reply to that notice the assessee filed a return in which he fully disclosed the particulars of his interest income but contended that the forest income was not taxable. By an order dated 12 July 1945 the Income‑tax Officer issued a revised assessment that incorporated both the forest and the interest incomes.

The respondent appealed the revised assessment to the Income‑tax Appellate Tribunal. The Tribunal, by its order dated 25 April 1949, concluded that the Income‑tax Officer lacked jurisdiction to initiate proceedings under section 34 of the Act concerning the forest income because the Officer was already aware of that income when the original assessment was made. Although the Tribunal’s adjudication concerned only the forest income, it inadvertently set aside the entire reassessment order of 12 July 1945 and restored the original assessment order. The Department did not utilise the remedy provided by section 35 of the Act to correct this mistake, nor did it seek to refer the issue of illegality to the High Court. Consequently, the Tribunal’s order was allowed to become final.

Following the finality of the Tribunal’s order, on 3 January 1950 the Income‑tax Officer, after obtaining sanction from the Commissioner, again invoked section 34 of the Act, this time solely with respect to the interest income. A fresh notice under the same provision was served on the assessee on 19 January 1950. Subsequently, on 25 September 1950 a revised assessment order was issued for the assessment year 1942‑43, wherein the respondent’s interest income was included. The appeal thus centered on whether the Officer was authorised to reopen the assessment for the interest income after the Tribunal’s order had become final.

The judgment recorded that after the revised assessment order dated 25 September 1950 included the respondent’s interest income, the Appellate Assistant Commissioner affirmed that order on appeal. Subsequently, the Income‑tax Appellate Tribunal held that because the assessee had failed to disclose his interest income in the return filed under section 22(2) of the Act in connection with the original assessment, the income had escaped assessment and therefore the provisions of section 34(1)(a) of the Act became applicable. On the basis of this finding, the Tribunal referred a question to the High Court under section 66(1) of the Act, posing whether, given the facts and circumstances of the case, the provisions of section 34(1) were applicable to the assessment year 1942‑43 on 19 January 1950, when the notice under that provision was issued for the purpose of assessing the escaped interest income.

The High Court concluded that the Tribunal’s order dated 25 April 1949 had erred clearly by setting aside the tax assessment on the interest income without examining the correctness of the tax imposition itself. Nevertheless, the High Court held that the Tribunal’s order had become final and that it did not invalidate the entire proceedings undertaken under section 34 of the Act. Consequently, the High Court determined that the Income‑tax Officer could not initiate fresh proceedings under section 34 of the Act, and it answered the Tribunal’s referred question in the negative. Following this decision, the Revenue appealed.

Counsel for the Revenue contended that the interest income had indeed escaped assessment and that, as a result, the Income‑tax Officer possessed the competence to commence proceedings under section 34(1)(a) of the Act to assess that income. Counsel for the respondent, on the other hand, argued that the assessment made by the Income‑tax Officer pursuant to the notice issued under section 34 of the Act had been entirely set aside by the Tribunal on the ground that there was no “discovery” within the meaning of that section. According to this counsel, the Tribunal’s order had become final, and therefore, on the principle of res judicata, the Income‑tax Officer could not commence fresh proceedings under the same provision.

To appreciate the contentions of the parties, it was necessary to examine the scope of the Tribunal’s order dated 25 April 1949. Before the Appellate Tribunal, the assessee argued that the Income‑tax Officer who issued the notice lacked definite information that would lead to the discovery that the income had escaped assessment within the meaning of section 34. In response, the Tribunal observed that it did not agree with the Department’s contention that the Income‑tax Officer had not applied his mind to the fact, because there was no evidence showing that, at the material time, such income was considered taxable by the Department. The Tribunal further explained that normally, when an Income‑tax Officer makes an assessment, he does so according to law and on the facts presented before him. If a fact is before him and he refuses to take it into account, believing it immaterial, or inadvertently overlooks it, it cannot be said that the Officer came into possession of definite information within the meaning of section 34. Accordingly, the Tribunal held that proceedings under section 34 could not be initiated against the assessee for the four assessment years in question, set aside the orders passed by the Income‑tax Officer for those years, and restored the original orders under section 23(3).

The Court explained that when a fact is presented to an Income‑tax Officer, and the officer either deliberately disregards it on the ground that it is immaterial or inadvertently overlooks it, such conduct does not satisfy the requirement of coming into possession of definite information as defined in section 34 of the Act. Accordingly, the Court held that proceedings under section 34 could not be initiated against the assessee for any of the four assessment years that were under consideration. Consequently, the orders that had been passed by the Income‑tax Officer in respect of those four years were set aside, and the original orders made under section 23(3) were restored.

The Court then reproduced the full order because the argument depended on the precise scope of that order. It noted that, in examining the validity of the notice issued under section 34, the Appellate Tribunal confined its discussion solely to the issue of the alleged escape of the year’s income and made no reference whatsoever to the interest income. The Tribunal concluded that, given the Income‑tax Officer’s knowledge at the time of the original assessment of the existence of the share income, the officer had not come into possession of definite information within the meaning of section 34. Although that finding was based only on the share income, the Tribunal nevertheless set aside the entire reassessment order and restored the original assessment order made under section 23(3) of the Act.

The Court observed that the legal effect of the Tribunal’s order was to nullify the reassessment of the whole income, which included both the share income and the interest income, on the ground that the Income‑tax Officer had not acquired definite information that would amount to a “discovery”. Therefore, the officer was barred from initiating any proceedings under section 34. While the Court acknowledged that the Tribunal had erred in setting aside the reassessment order concerning the interest income as well, it emphasized that, as long as the Tribunal’s order remained in force, it covered both categories of income. The Court further pointed out that the Income‑tax Officer had not pursued any additional proceedings by referring the matter to the High Court on any question of law arising from the Tribunal’s order, nor had he invoked section 35 of the Act to correct the order on the basis of mistake. As a result, the Tribunal’s order had become final.

Finally, the Court stated that the relevant question was not whether the Tribunal’s order, insofar as it related to the interest income, was the product of inadvertence or mistake, but whether the Income‑tax Officer was entitled to reopen proceedings under section 34 in spite of the Tribunal’s finding that the officer had not “discovered” any escaped income. The Court noted that the Income‑tax Act operates as a self‑contained statute establishing a hierarchy of tribunals with original, appellate and revisional jurisdictions, and that the statutory scheme governs the finality of such orders.

Section 31 of the Income‑Tax Act confers a right of appeal against certain orders of the Income‑Tax Officer to the Appellate Assistant Commissioner. Section 33 provides that a further appeal may be taken to the Income‑Tax Appellate Tribunal, and sub‑section (6) of section 33 stipulates that, except as provided in section 66, orders passed by the Appellate Tribunal on such appeals shall be final. Section 66 authorises a reference of a question of law to the High Court, while section 66‑A permits appeals in specified cases to the Supreme Court. The statutory scheme therefore makes it clear that an order of the Tribunal, issued within its jurisdiction and subject only to the limited exception in section 66, attains finality.

Consequently, the Tribunal’s decision on the matter that was the subject of appeal becomes final and cannot be reopened either by the assessee or by the Revenue Department. This principle was reiterated by the Judicial Committee in Commissioner of Income‑Tax, Bombay and Aden v. Khemchand Ramdas, where the Committee observed that once a final assessment has been made under sections 23 and 29, the Income‑Tax Officer does not have the power to continue making fresh computations or issuing fresh notices of demand indefinitely. The Committee further explained that a final assessment may be reopened only in the circumstances expressly enumerated in sections 34 and 35 of the Act and only within the time limits prescribed in those sections. In the same judgment the Committee added that the provisions of the two sections are exhaustive and specify the sole circumstances and the sole period within which fresh assessments and fresh demand notices may be issued.

The Judicial Committee later reaffirmed this view in Commissioner of Income‑Tax, West Punjab v. The Tribune Trust, Lahore. After examining the relevant statutory provisions, the Committee held that once an assessment has been made it remains valid and effective until it is set aside in accordance with the procedure prescribed by the Act; if it is not set aside, the assessment is final. Applying this principle, the order of the Tribunal that held the whole reassessment under section 34 to be invalid because there was no “discovery” that the income had escaped assessment became final.

Only sections 34 and 35 of the Act empower the Income‑Tax Officer to reopen a final assessment. If the Appellate Tribunal commits an error, section 35 allows that error to be corrected within four years from the date of the order. In the present matter the Tribunal had clearly erred by setting aside the reassessment order in respect of the interest income, although the validity of that part of the order was not contested. The Revenue, however, failed to invoke the clear remedy available under section 35 and permitted the mistake to remain uncorrected. The question that therefore arises is whether, under the circumstances, section 34 of the Act may be relied upon to initiate fresh proceedings.

In this case the Revenue side argued that section 34(1)(a), as it was amended in 1948, gave the Income‑tax Officer the authority to reopen an assessment even where the Tribunal had previously found that the Officer did not “discover” any escape of income. The counsel explained that before the amendment the operative portion of section 34 read: “(1) If in consequence of definite information which has come into his possession the Income‑tax Officer discovers that income, profits or gains chargeable to income‑tax have escaped assessment in any year ….” The amended provision, according to the Revenue argument, stated: “If the Income‑tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee 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 … he may, in cases falling under clause (a), at any time … serve on the assessee a notice …” The counsel further contended that the wording “has reason to believe … because of the omission or failure …” was broader than the original phrase “discovers that … have escaped assessment,” and that therefore the Tribunal’s finding that the Officer had not “discovered” any escape should not bar the Officer from commencing proceedings under the amended section.

The Court did not accept this line of reasoning. It held that the Legislature could not have intended, by amending the provision, to allow the Income‑tax Officer to reopen final decisions that had already been resolved in earlier proceedings, especially where those decisions directly concerned the same factual questions. The Tribunal in the earlier proceedings had determined that the Income‑tax Officer possessed all relevant facts at the time of the original assessment concerning the income later sought to be taxed. That finding implied that the Officer had no reason to believe that any escape of assessment resulted from the assessee’s failure to disclose material facts. Consequently, the Tribunal’s finding was comprehensive enough to negate any such reason on the part of the Officer. The Court emphasized that this finding was binding on the Officer; he could not, on the same set of facts, reopen the assessment on the ground of possessing new information. To do so would amount to an attempt to circumvent a final order. The Court clarified that it was not dealing with a situation where the Officer had genuinely obtained new information that was unavailable at the time of the Tribunal’s order. Because the Tribunal’s finding was binding, the Officer was prohibited from reopening the assessment and initiating fresh proceedings. The Court warned that accepting the Revenue’s argument would effectively grant the Officer an unrestricted power of review, allowing him to override the findings of tribunals, the High Court, or the Supreme Court based on changing personal judgments, which the Court found to be untenable.

The Court observed that an Income‑tax Officer could not set aside the findings issued by a hierarchy of tribunals, nor could he ignore the conclusions reached by the High Court or the Supreme Court, simply because his own opinion changed. The Court noted that the authorities cited by counsel for the Revenue did not support the proposition that the Officer possessed such unfettered discretion. In this regard, the Court referred to the decision of Chief Justice Chakraverti, speaking for a Division Bench in R. K. Das & Co. v. Commissioner of Income‑tax, West Bengal (1956) 30 I.T.R. 439, wherein it was held that an Income‑tax Officer was powerless to institute a reassessment unless he first issued a notice that complied with the statutory requirements and was issued in a valid form. The Court explained that the notice issued under section 34 of the Act in that case was declared defective because the Officer had failed to obtain the sanction of the Commissioner, and consequently the Chief Justice ruled that the income‑tax returns filed on the basis of that defective notice were themselves invalid. The Court clarified that it was not concerned with that particular aspect of the earlier case. The Court further referred to its own judgment in Commissioner of Income‑tax, Bihar & Orissa v. Maharaja Pratapsingh Bahadur of Gidhaur [1961] 2 S.C.R. 760, which held that a notice issued under section 34(1) without the required Commissioner’s sanction rendered the whole reassessment proceeding illegal. At the conclusion of that judgment, the Court observed that there was sufficient time to issue fresh notices and expressed puzzlement as to why the old notices had not been recalled and new ones issued. The Court emphasized that the present question—how far a final order rendered in earlier proceedings under section 34 would bind the Income‑tax Officer in later proceedings under the same provision—had neither been raised nor decided in the Gidhaur case. Consequently, the Court held that the earlier decisions did not bear on the issue presently before it. For these reasons, the Court affirmed that the answer given by the High Court to the reference was correct. Accordingly, the appeal was dismissed with costs, and the order of dismissal was entered.