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Income‑tax Reference No. 13 of 1955 decided on 4th February 1957.

S. 34(3) ‑ Concealment of Income‑Notice issued within 8 years but served after 8 years-- Assessment completed within one year of service of notice --Validity of assessment‑Construction of the proviso to S. 34(3) --"Issue", meaning of.

Though it is difficult to understand why the Legislature has used the expression "issue of the notice" in the proviso to subsection (3) of section 34 of the Income‑tax Act, while it has used the expression "service of the notice" in the main part of the subsection, this proviso cannot be so construed as to curtail the assessee's right under the main provision to have a notice under subsection (3) served within 8 years from the end of the year in which the concealed profits were first assess able. It is more appropriate to equate the expression "issued" used in the proviso with the expression "served" used in the main provision, than to equate the expression "served" in the main provision to "issued" used in the proviso. Further, the application of the proviso does not arise at all unless a valid notice has been served under the main provision.

The assessee made a return of his income for the assess ment year 1943‑44 and the assessment was completed on the 17th July, 1944. The Income‑tax Officer issued a notice under section 34 on the 20th March 1952, this notice was served on the assessee on the 16th April 1952 and an assessment was made on the 28th March 1953:

Held, that, as service of the notice was not effected within 8 years, the assessment was invalid in spite of the fact that the notice was issued within that period and the assess ment was completed within a period of one year from the date of service of the notice.

Sri Niwas v. Income‑tax Officer (1956) 30 I T R 381, approved.

By this application, the Commissioner of Income‑tax, Bombay South, Bombay, requires the Appellate Tribunal to refer to the High Court a question of law which is said to arise out of the Tribunal's order in I. T. A. No. 7300 of 1953‑54. Inasmuch as, in our opinion, a question of law does arise out of the said order, we hereby draw up a statement of the case agreed to by the parties and refer it to the High Court of Judicature at Bombay under section 66(1) of the Indian Income -tax Act.

2. The assessee was brought on the income‑tax list for the first time for the assessment year 1942‑43. It was found that he had no assessable income for that assessment year. Hence his income was declared to be not assessable. For the assess ment year 1943‑44, the Income‑tax Officer found that the assessee was working as the sole agent for ginning the cotton of the Gokak Mills Ltd., Gokak. He also ginned cotton for others. On the basis of account books produced, the Income‑tax Officer computed the assessee's loss at Rs. 1,220 and also determined that depreciation allowance admissible was Rs. 137. In the absence of profits, the said depreciation allowance was carried forward. This assessment was completed by him on 17th July 1944. Later, the Income‑tax Officer came to know that the assessee had invested Rs. 60,000 during the accounting year relevant to the assessment year 1943‑44. Hence on 13th March 1952, he recorded his reasons for initiating action under section 34(1) (a) and secured Commissioner's satisfaction on 15th March 1952, that it was a fit case for issue of a notice under section 34. In due course, on 20th March 1952, the Income‑tax Officer signed and issued a notice under section 34(1)(a). This notice was served on the assessee on 16th April 1952. The assessee made his return in due course and contended before the Income‑tax Officer that the assessment proceedings initiated by the notice issued on 20th March 1952, but served on 16th April 1952, were not properly initiated inasmuch as section 34(1)(a) required the Income‑tax Officer to "serve" the said notice on him within eight years of the end of the assessment year 1943 -44, i.e., on or before 31st March 1952, and as such re‑assessment, if made, would be invalid in law. The Income‑tax Officer rejected the contention and in doing so relied upon the first 'proviso to section 34(3), the material portion of which is as follows:

"Provided that where a notice under subsection (1) has been issued within the time therein limited, the assessment or re‑assessment to be made in pursuance of such notice may be made before the expiry of one year from the date of service of the notice even if such period exceeds the period of eight years or four years, as the case may be."

The Income‑tax Officer completed the re‑assessment on 28th March 1953, and determined the total income at Rs. 58,643. The Appellate Assistant Commissioner upheld the assessee's con tention, whereupon the Income‑tax Officer appealed to the Tribunal. It upheld the conclusion of the Appellate Assistant Commissioner for reasons given in its order dated 19th April 1955, a copy of which is Annexure "A" and which forms part of the case.

3. Out of these facts, the following question of law arises:

"Whether the re‑assessment made on 28th May 1953, by the Income‑tax Officer on the basis of the notice under section 34(1)(a) issued by him on 20th March 1952, but served on the assessee on 16th April 1952, was validly made "

Advocate‑General with G. N. Joshi for the Commissioner.

V. P. Pandit with S. V. Mazumdar for the Assessee.

‑A very short question in regard to the con struction of section 34, subsection (1), and the proviso to sec tion 34, subsection (3), arises on this reference. The assessee made his return of his income for the assessment year 1943‑44 and the assessment was completed on the 17th of July 1944.

It was then discovered that the assessee had not shown a certain income. Under the circumstances the Income‑tax Officer issued a notice on the 20th of March 1952, and this notice was served on the 16th of April 1952. This assessment was completed on the 28th of March 1953. The assessment was challenged on the ground that the notice pursuant to which this assessment was made was not valid, and the Tribunal held that the challenge was justified and held that the assessment could not be sustained.

Now section 34(1) deals with the notice and it provides that in cases falling under clause (a), with which we are concerned in this case, he may serve a notice within eight years of the end of that year, which in this case would be the 31st of March 1944. The notice, as I have already pointed out, was actually served on the 16th of April 1952, and, therefore, if we were not to look at any other provision of the Act, it is clear that the notice was not served within eight years as required by section 34. We have already held that a notice under section 34 is a condition precedent to the assessment to be made under this section, and as the notice was not served as required by section 34, any assessment made pursuant to that notice must be invalid. But what is relied upon by the Commissioner is the proviso to subsection (3) of section 34. Now subsection (3) of section 34 provides that no assessment under section 34 shall be made after the expiry of eight years from the end of the year in which the income, profits or gains were first assessable. As the year in which the income, profits or gains were first assessable ended on the 31st of March 1944, the order of assessment would have to be made under this subsection by the 31st of March 1952. But there is a proviso to this sub section and that proviso lays down that, where a notice under subsection (1) has been issued within the time therein limited, the assessment or re‑assessment to be made in pursuance of such notice maybe made before the expiry of one year from the date of the service of the notice even if such period exceeds the period of eight years or four years, as the case may be. Therefore, if the conditions laid down in the proviso are satisfied, a further period of one year is given to the taxing authorities to make the assessment and the assessment may be made one year from the date of the service of the notice even though such period may go beyond the period of eight years laid down in subsection (3) itself. In other words, if the proviso is applicable, the notice having been served on the 16th of April 1952, the assessment could have been made on or before the 16th of April 1953 ; and the contention of the Department is that this proviso applies and inasmuch as the assessment was com pleted on the 28th of March 1953, the assessment is valid. 'Now the clear fallacy underlying the contention of the Department is that we do not come to the stage of considering the assess ment order until the notice under section 34 is validly served. If the notice is served beyond the time limited by section 34, then the notice is bad and any proceedings taken pursuant to that notice are also bad. What is relied upon in the proviso is the language used in the first part of it, namely, "where a notice under subsection (1) has been issued within the time therein limited," and what is urged is that we must read in section 34, instead of the language used by the Legislature, namely, that the notice must be "served," the language used by the Legislature in the proviso to subsection (3), namely, that the notice has been "issued". In other words, the attempt is to equate the expression "served" used in section 34 with the expression "issued" used in the proviso to subsection (3). Now we must frankly confess that we find it difficult to understand why the Legislature has used in the proviso the expression "where a notice under subsection (1) has been issued within the time therein limited". In subsection (1) no time is limited for the issue of the notice, time is only limited for the service of the notice ; and, therefore, it is more appro priate that the expression "issued" used in the proviso to sub section (3) should be equated with the expression "served" rather than that the expression "served" used in subsection (1) should be equated with the expression "issued" used in the proviso to subsection (3). But assuming we are prepared to concede the Advocate‑General's contention that we must construe the ex pression "limited" as "mentioned" and all that the proviso refers to is the actual quantum of time mentioned in section 34(1), and that for the purpose of that proviso we must consider as the material or relevant date the issue of the notice and not the service of the notice, even so, as already pointed out, the ques tion of the application of the proviso only arises when an assessment order is made. Before a valid assessment order can be made, the initial and preliminary stage is to consider the validity of the notice. As the notice itself is invalid, nothing further survives for consideration. It is only when the notice is validly served that, in order to decide whether an assessment order is valid, we have to consider whether the assessment order was made within the period of one year from the date of the service and whether the notice was issued within the time men tioned in subsection (1). The Advocate‑General suggests that we must read the proviso to subsection (3) as an independent and substantive provision of law, and he suggests that the reason for enacting this proviso in the language in which the Legislature has enacted it is to deal with cases where after the issue of the notice the assessee seeks to evade service. Now, if the Legislature wanted to deal with such a contingency, the proper place to deal with it would have been in section 34(1). But we cannot possibly construe a proviso to subsection (3) as in effect and in substance curtailing the rights of the assessee to have the notice served within the time mentioned in section 34(1), because if we were to accept the Advocate General's contention, this must be the result, that after the Legislature has clearly provided that the assesee was entitled to have the notice served upon him within the period of eight years mentioned in section 34(1), in order that there should be a valid assessment under section 34 the Legislature proceeded under section 34(3) to take away that right and provided for the notice being issued within eight years and not necessarily served within eight years. We find that the High Court of Allahabad in a very recent judgment in Sri Niwas v. Income‑tax Officer ((1936) 30 I T R 381), has taken the same view of both section 34(1) and the proviso to subsection (3).

The result is that we must answer the question submitted to us in the negative. Commissioner to pay the costs.

Question answered in the negative.

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