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TMI Blog1958 (4) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... group may be called the group of Mysore appeals and within this group are eight appeals, namely, Civil Appeals Nos. 27 to 30 of 1956 and 161 to 164 of 1956. By reason of the circumstance that certain common questions of law and fact arise in all these eleven appeals, they have been heard one after the other ; but it will be convenient and will avoid confusion if we state the facts relating to the Travancore-Cochin group first and then deal with the questions arising therefrom. We shall then state the additional facts of the Mysore group of appeals, and answer the questions arising therefrom, in so far only as they have not been answered already in relation to the Travancore-Cochin group. It may be here added that in the Travancore-Cochin appeals (Civil Appeals Nos. 143 to 145 of 1954) the appellant is the assessee, A. N. Lakshmana Shenoy, of Messrs. New Guna Shenoy Company, Ernakulam, and the two respondents are the Income-tax Officers of Ernakulam in Cochin and of Kottayam in Travancore. In the other group of appeals, namely, the Mysore appeals, the appellants are the Income-tax Officers of certain income-tax circles in Bangalore and the respondents are assessees who carry on busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se him". Article IX of the covenant said that "the Rajpramukh shall within a fortnight of the appointed day execute on behalf of the United State an Instrument of Accession in accordance with the provisions of section 6 of the Government of India Act, 1935, and in place of the earlier Instruments of Accession of the covenanting States ; and he shall by such Instrument, accept as matters with respect to which the Dominion Legislature may make laws for the United State all the matters mentioned in List I and List III of the Seventh Schedule to the said Act, except the entries in List I relating to any tax or duty". There was a proviso to the article which said that nothing in the article shall be deemed to prevent the Rajpramukh from accepting any or all of the entries in the said List I relating to any tax or duty as matters with respect to which the Dominion Legislature may make laws for the United State. On July 14, 1949, a supplementary Instrument was executed by the Rajpramukh by which he accepted, on behalf of the United State, all matters enumerated in List I and List III of the Seventh Schedule to the Government of India Act, 1935, as matters in respect of which the Dominion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the territory of Travancore-Cochin became subject to the Constitution of India when it came into force ; but article 277 of the Constitution enacted : "Any taxes, duties, cesses or fees which, immediately, before the commencement of this Constitution, were being lawfully levied by the Government of any State or by any municipality or other local authority or body for the purposes of the State, municipality, district or other local area may, notwithstanding that those taxes, duties, cesses or fees are mentioned in the Union List, continue to be levied and to be applied to the same purposes until provision to the contrary is made by Parliament by law." The result of the aforesaid provision of the Constitution was that the taxes leviable under the Cochin Act or the Travancore Act continued to be so levied until provision to the contrary was made by Parliament by law. Such provision was made by the Finance Act, 1950 (XXV of 1950). Section 3 of that Act extended the Indian Income-tax Act, 1922, to the whole of India, except the State of Jammu and Kashmir, with effect from April 1, 1950. The interpretation of section 13(1) of the Finance Act, 1950, is one of the questions argued in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the taxes accordingly. The income of the assessee for the accounting year 1124 M.E. was assessed under the Indian Income-tax Act, 1922, in the assessment year 1951-52 by the Income-tax Officer, Ernakulam, by his order dated January 21, 1952. The account books of the assessee were rejected as unreliable and the Income-tax Officer, Ernakulam, made a "best of judgment" assessment. This assessment order is exhibit VIII in the record. The assessee appealed against it and, subsequently, on December 14, 1953, that is, subsequent to the decision on the three writ petitions filed in the High Court of Travancore-Cochin, the Appellate Assistant Commissioner, Trivandrum, passed an order which has been produced before us with an application for taking it on the record. We accepted the application and both the assessment orders, exhibit VIII dated January 21, 1952, and the appellate order dated December 14, 1953, will be duly considered by us. On February 12, 1952, the Income-tax Officer, Ernakulam, issued four notices to the assessee, two under section 44 of the Cochin Act and two under section 47 of the Travancore Act stating therein that in consequence of definite information which had com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three writ petitions, numbered as original petitions 53, 56 and 57 of 1952, were dealt with together by the Travancore-Cochin High Court and a Bench of three judges of the said High Court held by their judgment and order dated September 14, 1953, that the two Income-tax Officers concerned had jurisdiction to re-assess the income of the assessee for the two assessment years 1123 and 1124 M.E. They accordingly dismissed the writ petitions, but without costs. They, however, gave a certificate that the cases were fit for appeal to the Supreme Court under article 133 of the Constitution and on that certificate the three appeals, which we have called Travancore-Cochin appeals, have been brought to this court, from the judgment and order of the High Court of Travancore-Cochin dated September 14, 1953. In the High Court three main points were urged on behalf of the assessee : the first point taken was that with the passing of the Finance Act, 1950, which made Travancore-Cochin a " taxable territory " within the meaning of the Indian Income-tax Act, 1922, income-tax laws of Travancore and Cochin became void and inoperative and Parliament could not, under section 13, keep alive the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... integration of the States and Unions of States with India arose the problem of federal financial integration. The States and Unions of States, so long as they continued as separate units, had retained their own pre-existing public finance structures. They had one common feature, distinguishing them from the Provinces of India, in that except in respect of certain matters covered by the Standstill Agreements, the States were free to follow their own policies in matters of federal finance and taxation, that is to say, in the field of public finance, such as customs, income-tax, central excise, railways, posts and telegraphs, etc. When the question of integration of these States with India arose, naturally the question of extinguishing the special rights and obligations of the States in the field of federal finance and of making good to them the net gap in their revenues also arose. By a resolution dated October 22, 1948, the Government of India appointed a committee of experts, referred to as the Indian States Finances Enquiry Committee, to consider the problem of federal finance. The Committee's terms of reference were, inter alia, as follows --- " To examine and report upon : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Rajpramukh with the President of India on February 25, 1950, were designed to secure "legal continuity of pending proceedings" and "finality and validity of completed proceedings" under the pre-existing State legislation ; therefore, section 13(1) of the Finance Act, 1950, should be so construed as to be in consonance with the aforesaid agreement, and, in the alternative, if section 13(1) is construed to be at variance with the aforesaid financial agreement, it should be held to be void by reason of the provisions of articles 278 and 295 of the Constitution. We proceed now to a consideration in detail of the arguments urged before us on behalf of the assessee in the Travancore-Cochin appeals. In logical sequence the point as to the absence of foundation for the action taken by the two Income-tax Officers of Ernakulam and Kottayam in the matter of the issue of notices for re-assessment comes first, and we propose now to deal with it. It is necessary at this stage to set out the two sections under which the Income-tax Officers proposed to take action against the assessee. The two sections are section 44 of the Cochin Act and section 47 of the Travancore Act. Section 44 of the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made the necessary discovery. Learned counsel for the assessee has taken us through exhibit VIII, exhibit A (statement of the case submitted by the assessee to the Appellate Assistant Commissioner) and the order of the Appellate Commissioner, dated December 14, 1953, and he has contended that (1) exhibit VIII does not relate to the years in question and cannot, therefore, constitute definite information for those years ; (2) it gives certain highly speculative grounds for discrediting the account books of the assessee, which grounds have not been accepted by the Appellate Assistant Commissioner ; and (3) in any view, it contained no information on which the Income-tax Officers could be said to have made any discovery. As to (1) above, the High Court rightly pointed out that exhibit VIII contained information of a kind which disclosed a definite and systematic pattern of transactions for avoidance of tax not only in respect of the year covered by the order but spread over years anterior to it. Secondly, exhibit VIII disclosed, according to the Income-tax Officers concerned, a systematic suppression of cash sales, a regular trade in purchase and sale of controlled commodities at prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s accounts could be regarded as completely faultless and worthy of unquestioned acceptance. Seen from this broad angle, it cannot of course, be said that the accounts are free from defects. There is firstly no stock book for uncontrolled goods and the accuracy of the inventories of opening and closing stocks of such goods is, therefore, open to doubt. Again, whatever may be the appellant's reasons for not recording full details for cash sales, there is the admitted fact that the cash sales stand partly unvouched and details as to the names and addresses of purchasers are not available for the major part of the year, and there is, therefore, no possibility of satisfying oneself whether all the cash sales have been duly brought to account. There is also the further fact that at least some of the purchases are not satisfactorily vouched and that the rates of gross profit disclosed by the accounts both at the head office and the branches are not quite adequate. These, in my opinion, are sufficient grounds for discrediting the book results and resorting to an estimate of the turnover as well as the gross profit." It cannot, therefore, be said that the order of the Appellate Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income of the previous year of every individual, etc.", and "total income" means the "total amount of income, profits and gains computed in the manner laid down in the Act". It is clear that so far as the charging section is concerned, the liability does not cease unless the total income, profits and gains have been computed in the manner laid down in the Act. Section 4 states inter alia that subject to the provisions of the Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived. Leaving out the sections which deal with income-tax authorities we come to the sections in Chapter III, which explain what is taxable income under different heads. Chapter IV deals with deductions and assessment, and the words "assessment" and "re-assessment" occur in several sections of this Chapter. Under section 22(2) the Income-tax Officer must serve notice on any person whose total income is in the Income-tax Officer's opinion of such an amount as to render such person liable to income-tax, requiring him to furnish a return in the prescribed form of his total income during the previous year. Sub-section (4) authorises the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can cancel the assessment and direct a fresh assessment. Then comes section 34 which corresponds to section 44 of the Cochin Act and section 47 of the Travancore Act. In substance it deals with income which has escaped assessment for one reason or another and says in the operative part that the Income-tax Officer "may proceed to assess or re-assess such income, profits or gains, etc." There has been some argument before us as to the meaning of the juxtaposition of the words "assess or re-assess" occurring in the section, and it has been contended that a distinction has obviously been drawn between income which has totally escaped assessment and income which has been under-assessed or assessed at too low a rate, etc., and the word "assess" appropriately applies to the former case and the word "re-assess" to the latter case. Two other sections which are relevant for our purpose are sections 66 and 67. Section 66(7) says that notwithstanding that a reference has been made under this section to the High Court, income-tax shall be payable in accordance with the assessment made in the case. The word "assessment" here undoubtedly includes "re-assessment ". Section 67 which bars civil sui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax, Bombay Presidency and Aden v. Khemchand Ramdas. The Mysore High Court also referred to this decision in support of its view on the construction of section 13(1). We are unable to accept these contentions as correct ; nor do we think that the decision cited supports the view expressed by the Mysore High Court. The facts in Khemchand's case, were briefly these. The firm of Khemchand applied to the Income-tax Officer to have the firm registered, the consequence of such registration being that the profits of the firm would not be assessable to super-tax. On January 17, 1927, the Income-tax Officer assessed the firm to income-tax for the year 1926-27, under section 23, sub-section (4), of the Act ; but no super-tax was imposed as the firm having applied for registration was registered. Notice of demand for the amount assessed was made in 1927. Subsequently, the Commissioner ordered the cancellation of registration, and directed the Income-tax Officer to take necessary action thereupon. On May 4, 1929, the Income-tax Officer imposed super-tax and issued a notice of demand in May, 1929. The question in the appeal was whether the income-tax authorities had any jurisdict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould, in any case, hesitate long before acceding to a contention that would lead to so extravagant results. In their opinion, however, the contention cannot prevail. The Commissioner's powers under section 33, can only be exercised subject to the provisions of the Act of which the provisions in sections 34 and 35 are in this respect of the greatest importance." These observations lend no support to the view that the word "assessment" must always bear a particular meaning in the Income-tax Act. On the contrary, at page 423 of the report, their Lordships said : "These two questions are so closely related to one another that they can conveniently be considered together. In order to answer them it is essential to bear in mind the method prescribed by the Act for making an assessment to tax, using the word assessment in its comprehensive sense as including the whole procedure for imposing liability upon the taxpayer. The method consists of the following steps. In the first place, the taxable income of the taxpayer has to be computed. In the next place, the sum payable by him on the basis of such computation has to be determined. Finally, a notice of demand in the prescribed form, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld restrict the meaning of the expression "levy, assessment and collection of income-tax" ? Or, in the alternative, bring section 13(1) of the Finance Act, 1950, into conflict with articles 278 and 295 of the Constitution ? The relevant portion of the agreement between the President of India and the Rajpramukh of Travancore-Cochin dated February 25, 1950, states : " Now, therefore, the President of India and the Rajpramukh of Travancore-Cochin have entered into the following agreement, namely : --- The recommendations of the Indian States Finances Enquiry Committee, 1948-49 (hereinafter referred to as the Committee) contained in Part I of its report read with Chapters I, II and III of Part II of its Report, in so far as they apply to Travancore-Cochin (hereinafter referred to as the State) together with the recommendations contained in the Committee's Second Interim Report, are accepted by the Parties hereto, subject to the following modifications." The modifications which follow have no bearing on the question at issue and need not be set out. Now, let us examine the relevant recommendations of the Committee, which are accepted by the parties and form part of the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the States. (c) Such State Courts (except Courts of final appeal from orders of the State High Courts) as may in fact correspond to particular grades and classes of 'British Indian' Courts (Civil and Criminal) may have to be statutorily 'recognised' as 'corresponding judicial authorities' for purpose of dealing with cases arising in the States under the 'federal' laws of the Union of India ; and the Supreme Court in India will have to be made the Court of final appeal from decisions of the State High Courts to the same extent as in the case of Provincial High Courts. (d) Those sections of the various Indian Acts and Ordinances which set out their territorial 'extent of application' will require amending so as to include State territories with effect from the prescribed date. (e) It will be necessary to provide that all matters and proceedings pending under, or arising out of, the pre-existing State Acts shall be disposed of under those Acts, by so far as may be, the 'corresponding authorities', (nominated by the Chief Executive Authority) under the corresponding Indian Acts.' " In view of the fact that the members of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alidity of completed proceedings ; therefore, clause (a) is not the operative clause, and it merely indicates the reasons or objects for which certain limitations or qualifications are suggested on the proposal to repeal the State legislation. Clause (a) is followed by clauses (b), (c), (d) and (e). Clause (b) which deals with executive and administrative competence of Income-tax Officers and judicial authority of courts need not detain us. So also clauses (c) and (d), which have little bearing on the problem before us. Clause (e) is important, and it states that "all matters and proceedings pending under, or arising out of the pre-existing State Acts shall be disposed of under those Acts, etc." That a proceeding for reassessment under section 44, Cochin Act, or section 47, Travancore Act, is a proceeding arising out of the pre-existing State Acts admits of no doubt, and is clearly covered by clause (e). We see no good grounds why full effect should not be given to it ; it is one of the limitations, as stated in clause (a), subject to which the State law is to be repealed. The matter is made still more clear by what is stated in the paragraph that immediately follows, viz., paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three points urged on behalf of the assessee in the Travancore-Cochin appeals. Mysore Appeals : These are eight appeals and the relevant facts are these. Civil Appeals Nos. 27 to 30 of 1956 arise out of four writ petitions numbered 52 and 53 of 1953, and 105 and 106 of 1954, which were dealt with together in the Mysore High Court by a common judgment, dated December 14, 1954. Civil Appeals Nos. 161 to 164 also arise out of four writ petitions (No. 122 of 1954 and Nos. 35 to 37 of 1955) filed in the same High Court. The orders passed in those writ petitions were that they were governed by the aforesaid decision, dated December 14, 1954. In the result, all the writ petitions were allowed with costs. In all these cases the petitioners, who are respondents before us, were assessed to income-tax under the Mysore Income-tax Act, 1923 (hereinafter called the Mysore Act), for different years previous to the integration of Mysore with India, and the assessment proceedings were completed and closed under the Mysore Act by demand notices issued by the Income-tax Officers concerned. But subsequent to the integration of Mysore, notices under section 34 of the Mysore Act were issued against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial agreement of February 28, 1950, he had no doubt that section 13(1) did not provide for re-assessment under section 34 of the Mysore Act. The process of integration of Mysore with India was similar to that of Travancore-Cochin. The State of Mysore acceded to the Dominion of India by an Instrument of Accession executed on August 9, 1947, and accepted by the Governor-General on August 16, 1947. A supplementary Instrument of Accession was executed on June 1, 1949. By a Proclamation dated November 25, 1949, the Constitution of India to be adopted by the Constituent Assembly of India was accepted for Mysore, and on January 26, 1950, Mysore became a Part B State within the Constitution of India. A similar financial agreement was entered into by the Rajpramukh with the President of India on February 28, 1950. On April 1, 1950, the Finance Act, 1950, applied the Indian Income-tax Act, 1922, to Mysore, subject to the provisions of section 13 thereof. In dealing with the Travancore-Cochin appeals, we have fully dealt with the two grounds on which the respondent assessees in the Mysore appeals challenged the jurisdiction of the Income-tax Officers concerned to issue the notice ..... X X X X Extracts X X X X X X X X Extracts X X X X
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