K. C. Thomas vs Vasant Hiralal Shah and Ors

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 688 of 1962

Decision Date: 29 January 1964

Coram: J.R. Mudholkar, Bhuvneshwar P. Sinha, Raghubar Dayal, N. Rajagopala Ayyangar

The case was titled K. C. Thomas, First Income‑Tax Officer, versus Vasant Hiralal Shah and others and was decided on 29 January 1964 by the Supreme Court of India. The judgment was authored by Justice J. R. Mudholkar and the bench included Justices Bhuvneshwar P. Sinha, Raghubar Dayal and N. Rajagopala Ayyangar. The petitioner was K. C. Thomas, who held the position of First Income‑Tax Officer in Bombay, and the respondents were Vasant Hiralal Shah and his associates. The citation for the decision is 1964 AIR 1034 and 1964 SCR (6) 437, with a related citation of R 1965 SC 342 (20). The dispute concerned provisions of the Indian Income‑Tax Act, 1922, specifically sections 34(i), 34(ii) and 34(iii) as amended by Act XXV of 1953 and Act XVII of 1956, dealing with escaped income and the requirement of sanction for issuing a notice after the expiry of eight years.

According to the headnote, the petitioner had issued a notice under section 34(1) of the Income‑Tax Act, 1922, seeking assessment of escaped income amounting to Rs 47,595 for the assessment year 1944‑45. The respondents contended that the notice was invalid because the Income‑Tax Officer had not obtained the sanction of the Central Board of Revenue, which they argued was required by clause (iii) of the proviso to section 34(1). The respondents challenged the notice by filing a writ petition in the High Court, and the High Court ruled in their favour, setting aside the notice.

The Supreme Court held that the sanction required by clause (iii) of the proviso to section 34(1) is necessary only when the notice is issued under clause (ii) of that proviso. The Court explained that the legislative text uses the phrase “in any case failing under clause (ii)” to indicate that clause (iii) applies only to situations where a notice can be issued under clause (ii). Such a notice may be issued only when the escaped income is one lakh rupees or more. Consequently, clause (iii) demands the Central Board’s sanction only for notices falling within that category. The Court further observed that where, upon construing clause (ii), no notice can be issued for a class of escaped assessments, there is no requirement to obtain the Board’s sanction. If a notice is issued pursuant to another provision, such as the second proviso to sub‑section (3) of section 34, it falls under the “any other case” described in clause (iii), and in that circumstance only the Commissioner’s sanction is required. The Court noted that the necessary Commissioner’s sanction had been obtained in the present case, and therefore the notice could not be deemed invalid for lack of the Central Board’s sanction. The Court also pointed out that the escaped income in the present case was below one lakh rupees and that more than eight years had elapsed since the relevant assessment year.

The Court observed that a considerable period of time had passed since the assessment year in which the income was alleged to have escaped assessment. Because of this lapse, the Court held that a notice could not be issued under clause (ii) of the relevant provision. The Court further concluded that the High Court had erred in its decision that the second proviso to section 34(3) would not apply where the escaped assessment was an amount of less than one lakh rupees and more than eight years had elapsed. The Court noted that the High Court had failed to consider that the second proviso to subsection (3) of section 34 had been amended first by Act 25 of 1953 and subsequently by Act 18 of 1956. According to the Court, the amendment made by the 1956 Act governed the entire section 34(1) and therefore also covered escaped assessments for which the limitation appears in clause (ii) of the first proviso to section 34(1). The Court further stated that the same result would have been reached even if the case were governed by the 1953 amendment, although the 1956 amendment was the operative provision. Consequently, the earlier High Court position was reversed, and the Court affirmed that the statutory framework allowed the issuance of a notice despite the elapsed time and the amount being below one lakh rupees.

The Court then set out the procedural background of the appeal. It was a civil appeal numbered 688 of 1962, taken by special leave from a judgment and order dated 1 April 1958 of the Bombay High Court in Miscellaneous Application No. 202 of 1957. The appeal was heard on 29 January 1964, and the judgment was delivered by Justice Mudholkar. The appellant was the First Income‑Tax Officer of Bombay, who had issued a notice under section 34(1)(a) of the Indian Income‑Tax Act, 1922, to the respondents concerning escaped income of Rs 47,595 for the assessment year 1944‑45. The notice had been served on 27 March 1957. The respondents alleged that the notice was illegal because it concerned an amount of less than one lakh rupees and was issued after the assessment year had ended, and because the Income‑Tax Officer had not obtained the sanction of the Central Board of Revenue required by clause (iii) of the proviso to section 34(1). The Court noted that it was undisputed that the matter fell within section 34(1)(a), whose language states that if the Income‑Tax Officer has reason to believe that, by reason of an assessee’s omission or failure to file a return or to disclose material facts necessary for assessment, income, profits or gains have escaped assessment, the Officer may, in cases falling under clause (a), at any time serve a notice containing the requirements of a notice under subsection 2 of section 22 and may proceed to assess, reassess, or recompute the relevant amounts, as if the notice were issued under that subsection.

In the provision under discussion, the statute stipulates that if an Income‑tax Officer has reason to believe that, because of the omission or failure of an assessee to file a return of income under section 22 for any year, or to disclose fully and truly all material facts necessary for assessment for that year, income, profits or gains chargeable to income‑tax have escaped assessment for that year, have been under‑assessed, have been assessed at a too low rate, have been subjected to excessive relief under the Act, or an excessive loss or depreciation allowance has been computed, then the Officer may, in cases falling under clause (a), at any time, serve on the assessee a notice containing all or any of the requirements that 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. The provision further states that the provisions of the Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that subsection. The text quoted above is only the portion relevant to the point of contention. Following this, the first proviso to the same subsection is set out. It reads: “provided that the Income‑tax Officer shall not issue, a notice under clause (a) of sub‑section (1) (i) for any year prior to the year ending on the 31st day of March 1941; (ii) for any year, if eight years have elapsed after the expiry of that year, unless the income, profits or gains chargeable to income‑tax which have escaped assessment or have been under‑assessed or assessed at too low a rate or have been made the subject of excessive relief under this Act, or the loss or depreciation allowance which has been computed in excess, amount to, or are likely to amount to, one lakh of rupees or more in the aggregate, either for that year, or for that year and any other year or years after which or after each of which eight years have elapsed, not being a year or years ending before the 31st day of March 1941; (iii) for any year, unless he has recorded his reasons for doing so, and, in any case falling under clause (ii), unless the Central Board of Revenue, and, in any other case, the Commissioner, is satisfied on such reasons recorded that it is a fit case for the issue of such notice.” From this wording it follows that when the Officer believes that, because of any act of the assessee, a full and accurate declaration was not made for a particular year and consequently part of the assessee’s income escaped assessment for that year, the Officer is empowered to issue a notice under clause (a) at any time, subject only to the safeguards enumerated in the proviso.

The respondents, before the High Court, contended that the notice served on them was defective because it failed to satisfy the two conditions prescribed in the proviso to section 34(1). In addressing this contention, the High Court observed that, prior to the amendment of the provision which was in force on 27 March 1957, the period of limitation of eight years applied to the issuance of notices under section 34(1)(a), and a period of four years applied to cases falling under section 34(1)(b). The amendment removed the limitation period and provided that, where the case fell under section 34(1)(a), a notice could be served at any time. However, while eliminating the bar of limitation, the legislature introduced three safeguards for the assessee, which were set out in the proviso: the first safeguard prevented issuance of a notice for any year prior to the year ending on 31 March 1941; the second safeguard barred issuance of a notice after eight years if the escaped income aggregated to less than one lakh rupees; and the third safeguard required that the Central Board of Revenue be satisfied, based on recorded reasons, that the case was fit for issuance of a notice. The High Court’s observation therefore focused on the legislative intent behind these safeguards and their applicability to the notice in question.

In the earlier law, a limitation of eight years applied to the issuance of notices under section 34(1)(a) and a limitation of four years applied to notices under section 34(1)(b). The amendment removed these time limits and allowed a notice to be served at any time when the case fell under section 34(1)(a). Although the amendment eliminated the limitation period, the legislature introduced three safeguards for the assessee, which were set out in the proviso to the section. The first safeguard prohibited the issuance of a notice for any assessment year that ended before 31 March 1941. The second safeguard barred the issuance of a notice if more than eight years had elapsed and the escaped income amounted to less than one lakh rupees. The third safeguard required that the Central Board of Revenue be satisfied, based on the reasons recorded by the Income‑tax Officer, that the case was appropriate for the issue of a notice when the period exceeded eight years.

In the present matter, the amount of escaped income was less than one lakh rupees and the Central Board of Revenue had not examined the issue at all. Consequently, the petitioner's contention that the notice was invalid was not answered. The High Court correctly observed that a notice could not be issued where the escaped income was under one lakh rupees and more than eight years had passed since the assessment year. The Court noted, however, that an exception might arise under the second proviso to section 34(3), a point that would be addressed later.

The Court then turned to the High Court’s view that the sanction of the Central Board of Revenue was also required. Clause (iii) of the proviso to section 34(1) states that a notice may be issued only if the Central Board of Revenue is satisfied with the reasons recorded by the Income‑tax Officer for issuing the notice. For ease of reference, this requirement is described as the “sanction” of the Central Board. Importantly, this sanction is required only when the notice is issued under clause (ii) of the proviso. The legislature’s wording “in any case falling under clause (ii)” makes clear that the sanction applies solely to situations covered by clause (ii). Clause (ii) must be read together with the opening words of the proviso, which say “Provided that the Income‑tax Officer shall not issue a notice under clause (a) of sub‑section (1).” Thus, the phrase “in any case” in clause (iii) refers only to cases where a notice can be issued under clause (ii). A notice under clause (ii) can be issued only when the escaped income equals or exceeds one lakh rupees, and the safeguards mentioned earlier are satisfied.

In this case, the Court noted that counsel for the petitioner argued that clause (ii) of the proviso applied not only to escaped assessments of one lakh rupees or more but also to assessments below one lakh rupees, and therefore asserted that the sanction of the Central Board of Revenue was required even here. The Court observed that by expressly excluding action against escaped assessments of less than one lakh rupees, clause (ii) can, in one respect, be said to cover such assessments. However, the Court held that it would be incorrect to conclude that this circumstance obliges the issuance of a notice under clause (iii) to obtain the Central Board’s sanction. As already indicated, clause (iii) mandates the Central Board’s sanction only when a notice is issued under clause (ii). If, upon construing clause (ii), no notice can be issued for a particular class of escaped assessments, then the requirement of Central Board sanction does not arise. The Court further explained that where a notice is issued under a different statutory provision, for example the second proviso to sub‑section (3) of section 34, such a notice falls within the category of a notice “in any other case” mentioned in clause (iii) of the proviso to sub‑section (1) of section 34. In that situation, the only sanction required is that of the Commissioner. The Commissioner’s sanction had been obtained in the present case, and consequently the notice could not be considered invalid for lack of Central Board sanction. The Court then turned to the limitation aspect of the dispute. It noted that clause (ii) of the first proviso imposes a limitation on the Income‑tax Officer’s power, stating that if eight years have elapsed after the end of the relevant assessment year, no notice may be issued unless the escaped income is likely to be one lakh rupees or more. In the present facts, the escaped income was below one lakh rupees and more than eight years had passed since the assessment year concerned. Accordingly, the Court concluded that no notice could be issued under clause (ii). The Income‑tax Officer, however, contended that the limitation was removed by the second proviso to sub‑section (3) of section 34. The Court then quoted the relevant provision, which provides that no order of assessment or reassessment, except in specified situations, may be made after the expiry of four years from the end of the year in which the income, profits or gains were first assessable, subject to further qualifications.

The provision states that nothing in this subsection that limits the period within which any action may be taken or any order, assessment or reassessment may be made shall apply to a reassessment made under section 27, nor to an assessment or reassessment made on the assessee or any other person as a consequence of, or to give effect to, any finding or direction contained in an order under section 31, section 33, section 33A, section 33B, section 66 or section 66A. The Income‑Tax Officer argued that the second proviso to section 34(3) could be invoked because, in issuing the notice, the officer was giving effect to a direction contained in an order of a higher Income‑Tax authority. The High Court, while dealing with the matter, made several observations. It first noted that when a limitation of eight years existed under section 34(1)(a), the second proviso to section 34(3) had to be resorted to. The Court explained that the Income‑Tax Department needed to rely on section 34(3) if it wished to issue a notice after the limitation period had expired, and that a notice issued after eight years in a case falling under section 34(1)(a) could be issued only if it was a result of a direction contained in an order passed by an Income‑Tax Authority. The Court then observed that, because of the recent amendment, the question of limitation no longer arises, although the legislature has introduced certain safeguards. Consequently, whether a notice is issued as a result of a direction contained in any order of an Income‑Tax Authority or not, a notice issued beyond eight years must satisfy the conditions laid down in the proviso to section 34(1). The Court further explained that, in effect, the amendment has rendered the law more stringent in some respects and more lenient in others. Before the amendment, a notice could be issued after eight years for any escaped income, irrespective of the amount, provided the notice was issued to give effect to a direction contained in an order of an Income‑Tax Authority. After the amendment, a direction is no longer necessary for the issuance of a notice. However, the Court emphasized that an assessee whose escaped income is less than one lakh rupees is fully protected; even if a direction exists in an order of an Income‑Tax Authority, no notice may be issued against such an assessee when the escaped income is below one lakh rupees. Thus, the Court observed that an assessee with escaped income below one lakh rupees is now in a better position than before the amendment, whereas an assessee with escaped income exceeding one lakh rupees is in a worse position because the Central Board of Revenue may proceed against him even without a direction contained in an order of an Income‑Tax Authority, provided it has considered the matter.

In this case the High Court held that the second proviso to section 34(3) would not operate where the escaped assessment was less than one lakh rupees and more than eight years had passed. The Court, however, overlooked that the second proviso to subsection (3) of section 34 had been amended twice: first by Act 25 of 1953 and later by Act 18 of 1956. Before those amendments the provision read: “Provided further that nothing contained in this subsection shall apply to a re‑assessment made under section 27 or in pursuance of an order under section 31, section 33, section 33A, section 33B, section 66 or section 66A.” The 1953 amendment replaced the words “sub‑section” with the phrase “section limiting the time within which any action may be taken or any order, assessment or re‑assessment may be made”. The 1956 amendment further revised the language to the form that has already been quoted. If the present wording of the proviso applies to the facts, it governs the entire provision of section 34(1) and therefore also covers an escaped assessment for which limitation is provided in clause (ii) of the first proviso to section 34(1). In our view the outcome would be the same even if the case were governed by the 1953 amendment, although it would differ under the 1956 amendment. For completeness we note that the 1953 amendment took effect on 1 April 1953 and the 1956 amendment on 1 April 1956.

Beyond the view expressed by the learned judges regarding the effect of the changes made in section 34(1) with its provisos, we have earlier indicated that their interpretation is not correct. Consequently we will not consider further the proper construction of the second proviso to section 34(3), which is the issue that ultimately determines the validity of the notice issued to the respondents. At the start of the judgment the learned judges confined their analysis almost entirely to the construction of proviso (iii) to section 34(1), a construction that was decided in favor of the respondents and that prevented the respondents from addressing the other points they had raised. We do not intend to decide those additional points because the parties have not agreed on the precise content of the arguments that were raised. For the reasons set out above, the High Court’s decision is clearly erroneous. Accordingly, we allow the appeal, set aside the High Court’s order, and remit the matter back to that court for consideration of the other issues raised by the respondents but not heard. Regarding costs, we think they should follow the result of the appeal before the High Court. Appeal allowed and cave.

The Court concluded that the appeal was allowed and that the order of the High Court was set aside. Accordingly, the judgment directed that the entire matter be sent back to the High Court for further proceedings. The remand required the lower court to consider the additional issues that had been raised by the respondents but had not been heard earlier. By remanding the case, the Court ensured that the High Court would have the opportunity to examine those points and to make appropriate findings. The direction to remand the matter also implied that the procedural posture of the appeal would be reset, allowing the parties to present their arguments on the outstanding questions before the High Court. In effect, the Court's order to remand the case restored the pending issues to the jurisdiction of the High Court, thereby providing a complete opportunity for a fresh adjudication of the matters that had been left unaddressed in the earlier proceedings.