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Civil Appeals Nos. 7:4 to 756 of 1966, decided on 22nd August 1968.

(Appeals by special leave from the judgment and order of the Madras High Court dated September 16, 1964, in Tax Case No. 157 of 1960 (Reference No. 74 of 1960)).

Assessment‑Notices issued to Hindu undivided family‑Returns submitted by member as individual‑Assessment of family instead of individual‑Appellate Assistant Commissioner accepting partition in family and annulling assessments on family‑Whether gives jurisdiction to Income‑tax Officer to issue notice under S. 34‑Reference‑Question raised before Tribunal but not expressly considered‑Indian Income‑tax Act, 1922, Ss. 34(1), 34(3), second proviso, 66‑[M. K. K. R. Muthukaruppan Chettiar v. Commissioner of Income‑tax (1965) 55 I T R 674 reversed on different grounds].

The assessee, his son and his grandsons formed a Hindu undivided family which was assessed as such till the assessment year 1948‑49. In the course of the proceedings for 1949‑50 it was claimed that there was a partition between the assessee on the one hand and his son and grandsons on the other. For the assessment years 1950‑51, 1951‑52 and 1952‑53, pursuant to notices issued on the family, the assessee filed returns in his individual capacity in respect of income from the several sources that fell to his share in the partition. The Income‑tax Officer rejected the claim of partition, and, treating the returns filed by the assessee as returns filed by the family, he assessed the family. On appeal, the Appellate Assistant Commissioner held that there was a complete partition between the assessee, on the one hand, and his son representing the smaller family consisting of the son and the grandsons, on the other, recorded the partition under section 25‑A of the Income‑tax Act, 1922, and set aside the assessments, observing that the income required to be considered in the hands of the separate coparceners. Thereafter, the assessee, in his individual capacity, filed returns for the assessment years 1950‑51 and 1951‑52 on February 3, 1955, and a return for the assessment year 1952‑53 on June 30, 1956. Being of the opinion that he was entitled to give effect to the order of the Appellate Assistant Commissioner the Income‑tax Officer issued notices under section 34 for the assessment years on March 2, 1957. In compliance with the notices the assessee submitted returns under protest and ignoring his protest the Income‑tax Officer pissed orders on March 31, 1957, assessing the income of the assessee for those years, The question was whether the assessments were valid. The Tribunal held that the Income‑tax Officer had jurisdiction under the second proviso to section 34(3) to make the assess ments without any limit as to time; and on a reference the High Court held that the order passed by the Appellate Assistant Commissioner and the direction given by him lifted the bar of limitation. Though the assessee contended before the Tribunal that section 34(1)(a) was not applicable since the returns filed by him had not been disposed of, that contention was not expressly dealt with by the Tribunal. On appeal to the Supreme Court:

Held, (i) that the notices under section 34 could not be issued against the assessee in his individual capacity unless the returns which had already been filed by him were disposed of and the assessments made pursuant to the notice under section 34 were invalid;

(ii) that, since this question was raised before the Tribunal, even if it was not expressly dealt with by the Tribunal, it still arose out of the order of the Tribunal.

M. K. K. R. Muthukaruppan Chettiar v. Commissioner of Income‑tax (1965) 56 I T R 674 reversed on different grounds.

Commissioner of Income‑tax v. Ranchhoddas Karsondas (1959) 36 I T R 569 (S C) applied.

[The Supreme Court did not decide whether the observations of the Appellate Assistant Commissioner declining to assess the income of the Hindu undivided family operated to lift the bar of limitation qua the assessment of income of the separated members].

Commissioner of Income‑tax v. Scindia Steam Navigation Co. Ltd. (1961) 42 I T R 589 (S C) ; Income‑tax Officer v. Murlidhar Bhagwandas (1964) 52 I T R 335 (S C) and Sivalingam Chettiar (N. Kt.) v. Commissioner of Income‑tax (1968) 66 I T R 586 (S C) ref.

M. C. Chagla, Senior Advocate (B. Dutta and Mrs. Anjali K. Verma, Advocates and J. B. Dadachanji & Co., Advocates with him) for Appellants.

D. Narasaraju, Senior Advocate (S. K. Aiyar, B. D. Sharma and S. P. Nayar, Advocates with him) for Respondent.

Karuppan Chettiar, his son, Muthukaruppan, and his grandsons formed a Hindu undivided family which was assessed to income‑tax as a Hindu undivided family till the assessment year 1948‑49. In the course of assessment proceedings for 1949‑50 it was claimed on behalf of the Hindu undivided family that the properties and the several businesses of the family had been partitioned between Karuppan Chettiar on the one hand and Muthukaruppan and his sons forming a separate Hindu undivided family on the other. For the assessment years 1950‑51, 1951‑52 and 1952‑53 Karuppan Chettiar, pursuant to the notices under section 22(2) issued to the Hindu undivided family, submitted returns in his individual capacity in respect of the income from several sources that fell to his share at the partition. The Income‑tax Officer rejected the claim of Karuppan Chettiar that there bad been a partition of the Hindu undivided family and proceeded to assess the Hindu undivided family for the three years in question treating returns filed by Karuppan Chettiar as returns filed by the family. In appeal to the Appellate Assistant Commissioner the orders passed by the Income‑tax Officer were set aside. Holding that there had been a complete partition of the family estate between Karuppan Chettiar, on the one hand, and his son, Muthukaruppan, represent ing a smaller Hindu undivided family of himself and his minor sons. on the other, the Appellate Assistant Commissioner by order dated December 18, 1954, recorded the partition under section 25‑A of the Income‑tax Act and cancelled the assessments of the family for the three years in question. The Appellate Assistant Commissioner observed in his order:

"As such the present assessment requires to be annulled and the income considered in this assessment required to be considered in the hands of the separate coparceners."

After the order was passed, Karuppan Chettiar in his individual capacity filed returns for the assessment years 1950‑51, 1951‑52 and 1952‑53 for the first two years on February 3, 1955, and for the third year on June 30, 1956.

Being of the opinion that he was entitled to give effect to the order of the Appellate Assistant Commissioner recording partition of the Hindu undivided family of Karuppan Chettiar and his descendants and cancelling the orders of assessment of the family, the Income‑tax Officer issued notices on March 2, 1957, under section 34 of the Income‑tax Act to Karuppan Chettiar for assessment of his income as a separated member for the assessment years 1950‑51, 1951‑52 and 1952‑53. In compliance with the notices, Karuppan Chettiar submitted returns of his income for the three years in question under protest. The Income‑tax Officer ignored the protest and assessed the income of Karuppan Chettiar by his order dated March 31, 1958. The appeals filed by Karuppan Chettiar to the Appellate Assistant Commissioner and to the Income‑tax Appellate Tribunal were unsuccessful. The Tribunal held that, since the Appellate Assistant Commissioner had made a direction under his original order to assess the divided members separately, the Income‑tax Officer was invested with jurisdiction under the second proviso to subsection (3) of section 34 of the Income‑tax Act to make the impugned assessments without any limit as to time and that, independently of section 34, the assessments could also be supported under section 25‑A (2) and, in any event, the assess ment for the year 1952‑53 having been completed within four years' time‑limit from the end of the order of assessment was valid.

The Tribunal, at the instance of the assessee, submitted the following question to the High Court of Madras under section 66(1) of the Income‑tax Act, 1922:‑

"Whether the aforesaid assessments for 1950‑51, 1951‑52 and 1952‑53 are valid "

The High Court recorded an answer in the affirmative. In the view of the High Court, the order passed by the Appellate Assistant Commissioner and the direction given by him lifted the bar of limitation prescribed by section 34(3) for making the assessment.

We need not decide whether the observations made by the Appellate Assistant Commissioner in his order declining to assess the income of the Hindu undivided family operated to lift the bar of limitation qua the assessment of income of the separated members by the application of the principle of the judgments of this Court in Income‑tax Officer v. Murlidhar Bhagwan Das ((1964) 52 I T R 335), the and N. KT, Sivalingam Chettiar v. Commissioner of Income‑tax ((1967) 66 I T R 586), for, in our judgment, the orders passed by the income‑tax authorities and confirmed by the Tribunal suffer from a funda mental infirmity. As we have already observed, Karuppan Ch War submitted returns of his income In his individual capacity for the years 1950‑51, 1951‑52 and 1952‑53 in response to the notice issued under section 22(2). The Income‑tax Officer purported to treat those returns made on behalf of the Hindu undivided family and to assess the Hindu undivided family in respect of that income. That order was set aside. The returns submitted by Karuppan Chettiar in his individual capacity were, therefore, never considered and no assessment was made of Karuppan Chettiar as an individual on those returns. Karuppan Chettiar submitted fresh returns in February 1955, and June, 1956, before the notice under section 34 was issued on March 2, 1957. The notice under section 34 could not be issued against Karuppan Chetiar in his individual capacity unless the returns which had already been filed by him were disposed of.

It was held by this Court in Commissioner of Income‑tax v. Ranchhoddas Karsondas ((1959) 36 I T R 569 (S C)) that the return in answer to the general notice under section 22(1) of the Income‑tax Act can, under section 22(3), be filed at any time before assessment and for this there is no limit of time. When in respect of any year a return has been voluntarily submitted before assessment, the Income‑tax Officer cannot ignore the return and the notice of reassessment and consequent assessment under section 34 ignoring the return are invalid. Karuppan Chettiar in respect of his individual income had never been assessed to tax before he filed the returns and, unless the returns filed by him were disposed of, no notice under section 34 was competent. On that ground the notice under section 34 issued by the Income‑tax Officer was liable to be dismissed as incompetent and no assessments could be made in pursuance thereof.

We are unable to agree with the High Court that the question whether a notice under section 34 issued by the Income‑tax Officer on March 2, 1957, was incompetent did not arise out of the order of the Tribunal. It is clear from the statement of the case (vide paragraph 7) that Karuppan Chettiar had submitted before the Appellate Assistant Commissioner that "section 34(1)(a) was inapplicable since the returns made under section 22(3) had not been disposed of". Before the Tribunal also that contention was raised (vide paragraph 9 of the statement of case). The question was raised before the Tribunal. Even if it was not expressly dealt with by the Tribunal, it still arose out of the order of the Tribunal: Commissioner of Income‑tax v. Scindia Steam Navigation Co. Ltd. ((1961) 42 I T R 589 (S C)).

The appeals are allowed. The answer recorded by the High Court is discharged and is substituted by the answer that the assessments made by the Income‑tax Officer pursuant to the notice under section 34 of the Income‑tax Act, 1922, were invalid. The appellants will be entitled to their costs in this Court and in the High Court. One hearing fee.

Appeals allowed.

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