TMI Blog1958 (4) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... wn that the word "assessment" has been used in more than one sense in income-tax law, and so far as section 13(1) of the Finance Act, 1950, is concerned, there is no doubt that the expression "levy, assessment and collection of income-tax" has been used in a comprehensive sense so as to include the whole procedure for imposing liability upon the taxpayer. The Mysore appeals (Civil Appeals 27 to 30 of 1956 and Civil Appeals 161 to 164 of 1956) are allowed - Appeal Civil 143-145 of 1954 - - - Dated:- 28-4-1958 - Judge(s) : A. K. SARKAR., S. K. DAS., S. R. DAS., VENKATARAMA AIYAR., VIVIAN BOSE K.S. Krishnaswami Iyengar, M. U. Isaac and Sardar Bahadur, for the appellants in C. As. Nos. 143-45 of 1954. H. N. Sanyal, Addl. Solicitor-General of India, B. Ganapathy Iyer and R. H. Dhebar, for the appellants in C. As. Nos. 27-30 and 161-164 of 1956. R. Ganapathy Iyer and R. H. Dhebar, for the respondent in C. As. Nos. 143-145 of 1954. A. V. Viswanatha Sastri and G. Gopalakishnan, for the respondents in C. As. Nos. 27-30 of 1956. A. V. Viswanatha Sastri, K. R. Choudhury and G. Gopalakrishnan, for the respondents in C. As. Nos. 161-164 of 1956. JUDGMENT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Travancore Income-tax Act of 1121 M.E. (hereinafter referred to as the Travancore Act). He was so assessed by the Income-tax Officer at Ernakulam for the Cochin State and the Income-tax Officer at Kottayam for the Travancore State. It is a matter of history that Cochin and Travancore were formerly independent States, and till the lapse of Paramountcy, the Crown as represented by and operating through the political authorities provided the nexus between those States and the Central Indian Government. The Indian Independence Act, 1947, released the States from their obligation to the Crown ; but in August, 1947, the Rulers of the two States acceded to the Dominion of India. This was followed by a process of two-fold integration---the consolidation of the States into sizeable administrative units and their democratisation. On May 27, 1949, the Rulers entered into a covenant which was concurred in by the Government of India. By that covenant the Rulers agreed that as from the first day of July, 1949, the States of Travancore and Cochin should be united in and form one State with a common Executive, Legislature and judiciary by the name of the United State of Travancore and Cochin. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India shall be further strengthened ; it was then stated that the Constitution of India as drafted by the Constituent Assembly of India which included duly appointed representatives of the United State provided a suitable basis for strengthening the relation between the two States. The Proclamation then went on to say--- And whereas by virtue of the power vested in it under the Covenant establishing this State, the Legislative Assembly of the State has resolved that the Constitution framed by the Constituent Assembly of India be adopted by this State. I now hereby declare and direct --- That the Constitution of India shortly to be adopted by the Constituent Assembly of India shall be the Constitution for the United State of Travancore and Cochin as for the other parts of India and shall be enforced as such in accordance with the tenor of its provisions. That the provisions of the said Constitution shall as from the date of its commencement, supersede and abrogate all other constitutional provisions inconsistent therewith which are at present in force in this State. The Constitution of India came into force on January 26, 1950, and on that date Travancore-Cochin be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence in any such law to an officer, authority, tribunal or court shall be construed as a reference to the corresponding officer, authority, tribunal or court appointed or constituted under the said Act, and if any question arises as to who such corresponding officer, authority, tribunal or court is, the decision of the Central Government thereon shall be final. So far we have traced the constitutional history of the integration of Travancore-Cochin, its accession to the Dominion of India and finally its acceptance of the Constitution of India whereby it became a Part B State within the Constitution of India. We now go back to the story of the assessments made on the assessee. The income of the assessee for the two accounting years, 1122 and 1123 M. E. (corresponding to the years ending on August 16, 1947, and August 16, 1948, respectively), was assessed in the two assessment years, 1123 and 1124 M. E., in accordance with the Cochin Act by the Income-tax Officer at Ernakulam by his orders dated July 28, 1949, and January 31, 1950, respectively. These assessments, the assessee alleged, became final and he paid the taxes accordingly. Similarly, the income of the assessee in Trav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the two notices, because it was doubtful if the Income-tax Officer, Ernakulam, had authority to issue notices to the assessee under the Travancore Act. Nothing, however, turns upon this, so far as the appeals before us are concerned. On June 16, 1952, the assessee filed a writ petition in the High Court of Travancore-Cochin in which he challenged the jurisdiction of the Income-tax Officer, Ernakulam, to re-assess his income for the two assessment years, 1123 and 1124 M.E. On the very day on which the assessee filed his writ petition, the Income-tax Officer, Ernakulam, made an escaped income assessment under section 44 of the Cochin Act for the assessment year 1123. This order was communicated to the assessee on June 17, 1952, and the assessee filed a second writ petition in the High Court of Travancore-Cochin on June 19, 1952, in which he again challenged the jurisdiction of the Income-tax Officer, Ernakulam, to make the assessment under section 44 of the Cochin Act and further said that the assessment was made in spite of his application for adjournment and an order of stay passed by the High Court on June 17, 1952. On June 20, 1952, the assessee filed a third writ petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had any definite information in consequence of which they came to any discovery that the income of the assessee for the two years in question had been under-assessed or escaped assessment or had been assessed at too low a rate. It was contended on behalf of the assessee that the statements in the notices with regard to definite information, etc., were only a pretence to clutch at jurisdiction and the very foundation of the action sought to be taken by the Income-tax Officers under section 44 of the Cochin Act or section 47 of the Travancore Act was non-existent. The learned judges of the High Court negatived the aforesaid contentions, and, as we have already stated, dismissed the writ petitions. Before us the first point urged on behalf of the assessee in the High Court has not been pressed. The other two points, namely, (1) the true construction of section 13(1) of the Finance Act, 1950, and (2) the absence of any foundation for the action sought to be taken under section 44 of the Cochin Act or section 47 of the Travancore Act have been pressed with great vehemence. A third point which was specifically raised in the Mysore appeals in the High Court there and which arises i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments were entered into between the President of India and the Rajpramukhs, including the Rajpramukh of Travancore-Cochin and the Rajpramukh of Mysore. We shall refer in somewhat greater detail to these agreements, particularly the agreements entered into by the Rajpramukhs of Travancore-Cochin and Mysore. The contention on behalf of the assessee is that these agreements with Part B States with regard to certain financial matters received constitutional sanctity in article 278 of the Constitution (now repealed by the Constitution Seventh Amendment Act, 1956). Article 278, so far as it is relevant for our purpose, was in these terms : 278. (1) Notwithstanding anything in this Constitution, the Government of India may, subject to the provisions of clause (2), enter into an agreement with the Government of a State specified in Part B of the First Schedule with respect to --- (a) the levy and collection of any tax or duty leviable by the Government of India in such State and for the distribution of the proceeds thereof otherwise than in accordance with the provisions of this Chapter ; (b) ................. (c) .................. and, when an agreement is so entered int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taining all or any of the requirements which may be included in a notice under sub-section (2) of section 27, and may proceed to assess or re-assess such income, profits or gains, and the provisions of this Act shall so far as may be, apply accordingly as if the notice were a notice issued under that sub-section. Section 47(1) of the Travancore Act is identical in terms and need not, therefore, be quoted. It is worthy of note that the terms of the aforesaid two sections are similar to section 34 of the Indian Income-tax Act, 1922, as it stood after the Amending Act of 1939 and before the amendments of 1948. The two requisite conditions for the application of the section are contained in the first part, and they are firstly, there must be definite information which has come into possession of the Income-tax Officer and, secondly, in consequence of that information, the Income-tax Officer discovers that income, profits or gains chargeable to income-tax have escaped assessment in any year, etc. It is only when these two conditions are fulfilled that the Income-tax Officer can take necessary action under section 44. The question before us is whether these two conditions were fulfi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained in exhibit VIII was really non-existent, and the information being non-existent, there was no foundation for the action taken by the Income-tax Officers. We are unable to accept this argument as correct. Apart from the consideration that the order of the Appellate Assistant Commissioner was not available when the Income-tax Officers issued their notices, we think that the argument overstates the effect of the order of the Appellate Assistant Commissioner. It is true that the Appellate Assistant Commissioner considered in detail the various criticisms of the Income-tax Officer with regard to the account books along with the explanations offered on behalf of the assessee ; but he expressed his final conclusion in the following words : I have given my careful consideration to the various adverse criticisms of the Income-tax Officer and to the advocate's answers thereto. I have also looked into the accounts and other relevant papers. As a result, I am satisfied that the Income-tax Officer's criticisms are in most cases not at all well founded and that the advocate has successfully met almost every point raised by the former. In fact, the Income-tax Officer himself ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nexion between the information and the discovery but discovery in the context of the section does not mean a conclusion of certainty at the stage of notice. What is necessary at that stage is that the Income-tax Officer should have formed an honest belief upon materials which reasonably support such belief. This, in our opinion, is the correct view, and judged from that standpoint, exhibit VIII fulfilled the requirements of section 44 of the Cochin Act and section 47 of the Travancore Act. We now turn to the construction of section 13(1) of the Finance Act, 1950. The argument on this point has meandered over a wide area ; but it is really dependent on the meaning to be given to the expression for the purposes of the levy, assessment and collection of income-tax and super-tax occurring in the section. Does the word assessment include re-assessment ? The contention of the assessee is that it does not. The Travancore-Cochin High Court did not accept this contention, but the Mysore High Court did in favour of the respondents in the Mysore appeals. The general scheme of the Cochin Act and the Travancore Act is the same as that of the Indian Income-tax Act, 1922, and for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce relied on in support of the return. Sub-section (3) provides that the Income-tax Officer after hearing such evidence as the person who made the return may produce and such other evidence as the Income-tax Officer may require on specified points shall by an order in writing assess the total income and determine the sum payable. Sub-section (4) makes provision for an assessment by the Income-tax Officer to the best of his judgment if the assessee fails to make a return or to comply with the terms of the notices issued to him. This whole procedure, it may be recalled, not only applies on first assessment but is also prescribed by section 34 if for any reason income, profits or gains have escaped assessment or have been assessed at too low a rate. Section 27 deals with cancellation of assessment in certain circumstances, and states it the Income-tax Officer shall cancel the assessment and proceed to make a fresh assessment in accordance with the provisions of section 23 . Section 29 talks of a notice of demand to the person liable to pay the tax, etc., the notice specifying the sum so payable. Section 30 gives a right of appeal from certain orders. Section 31 deals with hearing of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he long title says that the Finance Act, 1950, is an Act to give effect to the financial proposals of the Central Government for the year beginning on April 1, 1950, and in section 13(1) the collocation of words is levy, assessment and collection of income-tax in our opinion, both these circumstances point towards a comprehensive meaning ; for it could not have been intended, as part of the proposal of the Central Government, that those whose income had totally escaped assessment should be liable but those who had been under-assessed should go scot free. We can see nothing in the words of the section which would justify such a distinction ; we say this quite apart from the argument that section 13(1) should be interpreted in consonance with the financial agreement entered into between the Rajpramukh and the President, an argument to which we shall presently advert. Moreover, the collocation of the words, levy, assessment, and collection indicates that what is meant is the entire process by which the tax is ascertained, demanded and realised. On behalf of the assessee it has been contended that (1) the Income-tax Act makes a distinction between a normal or original assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n end, there can be no final assessment. But when once a final assessment is arrived at, it cannot in their Lordships' opinion be reopened except in the circumstances detailed in sections 34 and 35 of the Act (to which reference is made hereafter) and within the time limited by those sections. In the present case the liability of the respondents both for income-tax and for super-tax was determined by the Income-tax Officer on January 17, 1927. In the order made by him on that date he assessed the respondents to income-tax at the maximum rate, but as the respondents were at that time a registered firm he held, as he was bound to hold, that no super-tax was to be levied. On some date before the end of March, 1927, he served on the respondents a notice of demand for the tax that he had determined was properly leviable. The assessment having been made under section 23(4) no appeal lay in respect of it. The assessment of the respondents was therefore final both in respect of income-tax and super-tax. Their liability in respect of both taxes had been finally determined, and none the less because the question of their liability to super-tax had been determined in their favour. It was, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in tax which the taxpayer is liable to pay. It has been contended before us that the Finance Act and the Income-tax Act should be read together as forming one code, and so read the words assessment and re-assessment acquire definite and distinct connotations. We are unable to agree, for the reasons which we have already given, that even if we read the Finance Act along with the Income-tax Act the word assessment can be given a restricted meaning. To repeat those reasons : the Income-tax Code itself uses the word assessment in different senses, and in the context and collocation of the words of the Finance Act, the word assessment is capable of bearing a comprehensive meaning only. We can find no good reasons for holding that in the matter of levy, assessment and collection of income-tax, the Finance Act, 1950, contemplated that some persons should enjoy a privilege and escape payment of the full tax leviable under the provisions of the relevant Act. On this point we approve of the decision in Firm L. Hazari Mal v. Income-tax Officer, Ambala, where Bhandari, C.J., said : These three expressions 'levy', 'assessment' and 'collection' are of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the States by the Centre. This is a difficult subject upon which we are not qualified to offer competent advice. We have endeavoured, however, to indicate below the main features of what we conceive will be required in order to establish 'continuity of proceedings' in regard to all 'federal' subjects---whether relating to revenues, expenditure or Service Departments---at the point of their transition from the States to the Centre ; ......... (a) Almost every 'federal' subject is dealt with in the State as in the rest of India, under powers conferred by appropriate legislation consisting of relevant Codes, Acts, Ordinances and Statutory Rules and Regulations. Subject to the limitations indicated below,---which are designed to secure legal 'continuity' of pending proceedings and 'finality and validity' of completed proceedings under the pre-existing State legislation---, we think the whole body of State legislation relating to 'federal' subjects should be repealed and the corresponding body of Central legislation extended proprio vigore to the States, with effect from the prescribed date or as and when the administration of parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eatures of what the Committee thought was required, and they should not be placed on a pedestal higher than what the Committee itself did. We think that there is much force in this contention ; but in the view which we have taken of these recommendations, we do not think that it is necessary to decide finally what constitutional sanctity they have acquired by reason of their acceptance in the financial agreement and the provisions of article 278 of the Constitution. Assuming but without deciding that they have binding force, what is their true meaning and effect ? The argument on behalf of the assessee is that clause (a) of the recommendations is the operative clause, and inasmuch as it talks of continuity of pending proceedings and finality and validity of completed proceedings under the pre-existing State legislation, the true effect is that all assessment proceedings which have become complete and final by the issue of a demand notice under section 29 of the Indian Income-tax Act (or corresponding section of the Cochin Act or Travancore Act) are saved under the clause and cannot be reopened ; and only proceedings actually pending on the relevant date can be continued thereun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repeal of the State law ; it gave a wider meaning to pending proceedings---that is, proceedings pending under and arising out of the pre-existing State Acts . It is to be remembered that where an assessment starts with a notice under section 34 of the Indian Income-tax Act (or corresponding section of the Cochin or Travancore Act), all the relevant provisions of that Act apply as effectively as where the assessment starts with a notice under section 22(2)---or corresponding section of the Cochin or Travancore Act---in the ordinary course. It is also not disputed that the assessment made under section 34 in any year subsequent to the relevant assessment year must be made as if it were made in the relevant assessment year, and the assessment must be based on the provisions of the Act as it stood in the year in which the income ought to have been assessed. Having regard to these considerations, we find no difficulty in holding that a reassessment proceeding under section 44, Cochin Act, or section 47, Travancore Act, is a proceeding which comes under cl. (e) of the recommendations of the Committee, and must be disposed of under the pre-existing State law. Section 13(1) of the Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice issued under that sub-section : Provided that the tax shall be charged at the rate at which it would have been charged, had the income, profits or gains, not escaped assessment, or full assessment, as the case may be. It corresponds to section 34 of the Indian Income-tax Act as it stood prior to the Amending Act of 1939 and the general scheme of the Mysore Act was the same as that of the Indian Income-tax Act, 1922, as it stood before 1939. The two grounds on which the jurisdiction of the Income-tax Officers was challenged were : (1) Under the Finance Act, 1950, the Mysore Act stood repealed on and from April 1, 1950, and section 13(1) of the Finance Act kept alive the Mysore Act for the purpose of levy, assessment and collection of income-tax, etc., for the period mentioned therein, but did not save section 34 of the Mysore Act for the purpose of re-assessment of income-tax ; therefore, the notices issued under section 34 of the Mysore Act were without jurisdiction and authority. (2) Even otherwise, the financial agreement between the President of India and the Rajpramukh of Mysore on February 28, 1950, which received constitutional sanctity in article 278 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision in these appeals is the true scope and effect of section 13(1) of the Finance Act, and on that question the additional points mentioned above throw very little light. There is, indeed, a distinction between an original or normal assessment under section 23 and a re-assessment under section 34 ; but we have shown that the word assessment has been used in more than one sense in income-tax law, and so far as section 13(1) of the Finance Act, 1950, is concerned, there is no doubt that the expression levy, assessment and collection of income-tax has been used in a comprehensive sense so as to include the whole procedure for imposing liability upon the taxpayer. Result : The final result, therefore, is---(a) the Travancore-Cochin appeals (Civil Appeals 143 to 145 of 1954) are dismissed with costs ; and (b) the Mysore appeals (Civil Appeals 27 to 30 of 1956 and Civil Appeals 161 to 164 of 1956) are allowed and the judgment and orders of the Mysore High Court are set aside. The appellants in these Mysore appeals will be entitled to their costs in this court and the High Court of Mysore. Civil Appeals Nos. 143 to 145 of 1954 dismissed. Civil Appeals Nos. 27 to 30 and 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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