1964 (4) TMI 19 - SC - Income Tax

Whether it was the intention of the legislature to deprive a taxpayer of the plea that action for assessment or reassessment could not be commenced on the ground that before the amending Act became effective it was barred? Held that - The legislature has given to section 18 of the Finance Act 1956 only a limited retrospective operation i.e. up to April 1 1956 only. That provision must be read subject to the rule that in the absence of an express provision or clear implication the legislature does not intend to attribute to the amending provision a greater retrospectivity than is expressly mentioned nor to authorise the Income-tax Officer to commence proceedings which before the new Act came into force had by the expiry of the period provided become barred. Appeal dismissed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

- Whether the Income-tax Officer had the authority to issue a notice of assessment under section 34 of the Indian Income-tax Act, 1922, against the assessee as an agent of non-resident parties under section 43, after the expiry of the original one-year limitation period prescribed before the amendment by the Finance Act, 1956.

- Whether the amendment introduced by section 18 of the Finance Act, 1956, which extended the limitation period for issuing such notices from one year to two years, applied retrospectively so as to validate the notice issued after the original limitation period had expired.

- The proper interpretation of the limitation provisions in section 34, including the effect of the proviso relating to agents of non-resident persons and the impact of the amendment on the power to issue notices.

- Whether the assessment proceedings initiated after the expiry of the original limitation period but within the extended period under the amended statute were legally maintainable.

- The applicability of principles of statutory interpretation, including retrospective operation of statutes, and the distinction between procedural laws and substantive rights in the context of tax assessment limitation periods.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Authority of the Income-tax Officer to issue notice under section 34 after expiry of original limitation period

The legal framework involved section 34 of the Indian Income-tax Act, 1922, which prescribed limitation periods for issuance of assessment or reassessment notices. Prior to amendment by the Finance Act, 1956, the proviso to section 34(1)(b)(iii) substituted a one-year limitation period for cases where the person assessed was deemed an agent of a non-resident under section 43.

The Income-tax Officer issued a notice on March 27, 1957, which was beyond the original one-year limitation period ending March 31, 1956. The assessee contended that the notice was invalid as it was issued after the expiry of the prescribed period and thus barred by limitation.

The Court examined the original section 34 proviso and found that the statutory power to issue a notice under the unamended Act had expired on March 31, 1956. No notice could be validly issued thereafter under the original provision.

Issue 2: Effect of Finance Act, 1956 amendment extending limitation period

Section 18 of the Finance Act, 1956, amended section 34 by substituting the proviso (iii) with a provision extending the limitation period for issuing notices against agents of non-residents from one year to two years from the end of the assessment year. The amendment came into force on April 1, 1956, after the original one-year period had expired.

The Court analyzed whether this amendment could be applied retrospectively to validate notices issued after the expiry of the original limitation period but within the extended two-year period. It was common ground that the amendment was not expressly retrospective before April 1, 1956.

The Court held that the power to issue notices under the original Act ended before the amendment came into force, and the amendment did not revive or extend the expired power. The principle applied was that unless expressly provided, an amendment extending limitation periods does not revive a right to act that has already been barred under the earlier law.

The Court rejected the Commissioner's argument that the amendment should be read as a continuation of the old law with modifications, noting that the amendment abrogated the old limitation rule and enacted a new one with limited retrospective effect only from the date of commencement.

Issue 3: Principles of statutory interpretation and limitation

The Court considered relevant principles, including the General Clauses Act provision that statutes come into operation immediately upon the expiration of the previous day, and precedents from English and American law regarding retrospective operation of statutes.

The Court distinguished the present case from those precedents, emphasizing that the amendment did not expressly revive barred rights and that limitation provisions in tax law are not mere procedural rules but impose substantive fetters on the power to assess or reassess income.

The Court also discussed the nature of tax assessment proceedings, clarifying that they are administrative and statutory in character, not civil suits, and that limitation periods in tax statutes serve to restrict the State's power to assess escaped income.

The Court referred to prior decisions holding that expiry of limitation bars the machinery for assessment and cannot be overridden by subsequent amendments unless the legislature clearly intends such retrospective effect.

Issue 4: Treatment of competing arguments on retrospective effect

The Court addressed the Commissioner's reliance on cases where amendments were held to have retrospective effect or where statutes were construed as continuations of previous laws. The Court found these inapplicable because the amendment here was not a re-enactment but a substantive change with limited retrospective scope.

The Court also considered arguments equating limitation in tax proceedings with limitation in civil suits, rejecting the analogy as tax limitation provisions impose substantive jurisdictional bars rather than mere procedural time limits.

Further, the Court noted that the legislature's limited retrospective operation clause in the Finance Act, 1956, did not authorize issuance of notices after expiry of the original limitation period.

Issue 5: Application of law to facts and conclusion

Applying the above legal principles to the facts, the Court held that the Income-tax Officer's notice issued on March 27, 1957, was invalid as it was beyond the original one-year limitation period and the amendment did not revive the power to issue it.

The High Court's decision to quash the assessment proceedings was upheld. The Court dismissed the appeal with costs, confirming that the assessment under section 34 as an agent of non-resident parties was not maintainable.

3. SIGNIFICANT HOLDINGS

"The power to issue a notice under the earlier Act came to an end before the new Act came into force. There was undoubtedly no determinable point of time between the expiry of the earlier Act and the commencement of the new Act; but that would not, in our judgment, affect the application of this rule."

"The legislature has given to section 18 of the Finance Act, 1956, only a limited retrospective operation, i.e., up to April 1, 1956, only. That provision must be read subject to the rule that in the absence of an express provision or clear implication, the legislature does not intend to attribute to the amending provision a greater retrospectivity than is expressly mentioned, nor to authorise the Income-tax Officer to commence proceedings which before the new Act came into force had by the expiry of the period provided become barred."

"The period prescribed by section 34 for assessment is not a period of limitation. The section in terms imposes a fetter upon the power of the Income-tax Officer to bring to tax escaped income... Once a final assessment has been made, it can only be reopened to rectify a mistake apparent from the record (section 35) or to reassess where there has been an escapement of assessment of income for one reason or another (section 34)... all these periods of time... merely create a bar when that time passed against the machinery set up by the Income-tax Act for the assessment and levy of the tax."

"A proceeding for assessment is not a suit for adjudication of a civil dispute... The income-tax authorities who have power to assess and recover tax are not acting as judges deciding a litigation between the citizen and the State: they are administrative authorities whose proceedings are regulated by statute."

The Court established the core principle that an amendment extending limitation periods for tax assessments does not revive the power to assess where the original limitation period has already expired before the amendment came into force, absent express legislative intent.

The final determination was that the reassessment notice issued after the expiry of the original limitation period but within the extended period under the amended statute was invalid, and the assessment proceedings were not maintainable.

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