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Writ Petition No. 886 of 1957, decided on 16th March, 1960.

Income‑tax Act (XI of 1922)-----

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Ss. 23‑A, 34 (1) (b) (before amendment of 1955)‑Company‑Undistributed profits‑Distribu tion order‑Shareholder‑Reopening of assessment‑Limitation --Service of notice necessary:

Where an order under section 23‑A of the Income‑tax Act that the undistributed profits of a company shall be deemed to be distributed is passed after completion of the assessment of the shareholder for the year in which the dividend so distributed must be deemed to have accrued, the Department does not have, independent of section 34, any right, under the terms of section 23‑A itself, to reopen the assessment of the shareholder. The period of limitation for re‑assessment under section 34 (1) of the Income tax Act is to be computed only with reference to the assessment year of the shareholder, and the date on which the order under section 23‑A is passed against the company is not relevant in com puting the period of limitation, either for the assessment or for the re‑assessment of the shareholder.

A notice issued under section 34 (1) (b) of the Income‑tax Act beyond four years after the expiry of the assessment year of a shareholder to reopen assessment of that year for the purpose of including the dividend deemed to be distributed by an order under section 23‑A (1), is invalid and does not confer any jurisdiction on the Income‑tax Officer to reopen the assessment.

Section 34 (1) of the Income‑tax Act refers only to the assessee, and the year with which the assessee is concerned, is the assessment year of the assessee. There is no scope for importing into section 34 (1) any further consideration.

The service of a valid notice is a condition precedent to the assumption of jurisdiction under section 34.

Commissioner of Income‑tax v. Robert J. Sas (1958) 34 I T R 222 followed.

Commissioner of Income‑tax v. Robert J. Sas (1958) 34 I T R 222 ; Navinchandra Mafatlal v. Commissioner of Income‑tax (1955) 27 I T R 245 and Spencer v. Income‑tax Officer, Madras (1951) 31 I T R 107 ref.

R. Venkatram and S. Ramamurthi for Petitioner.

C. S. Rama Rao Sahib and S. Ranganathan for Respondent.

RAJAGOPALAN, J.‑

The petitioner was a shareholder in Somasundaram Mills (Private) Ltd., a company which admittedly fell within the scope of section 23‑A of the Indian Income‑tax Act.

For the assessment year 1950‑51, the previous accounting year for which ended on April 1, 1950, the assessee was assessed to tax, and that assessment was completed on May 31, 1953. Subse quently, on March 31, 1957, an order was passed against Somasundaram Mills Ltd. under section 23‑A of the Act. The date of the general meeting, with reference to which the assessee's dividend income must be deemed to have accrued under section 23‑A, was September 22, 1949 which fell within the year of account, for which the assessee was liable to be assessed in the assessment year 1950‑51. After an order had been passed on March 31, 1957, under section 23‑A of the Act, proceedings were taken to reopen the assessment of the assessee for the assessment year 1950‑51. A notice was issued by the Income‑tax Officer under section 34 (1) (b) of the Act, and it was served on the assessee on September 14, 1957.

The assessee applied under Article 226 of the Constitution for the issue of a writ of prohibition to restrain the Income‑tax Officer from proceeding further with any re‑assessment under colour of the notice served on the assessee on September 14, 1957. During the pendency of these proceedings, however, the Department was allowed, without any interim order of stay, to complete the assessment, so that the position now is, that an assessment has been completed under section 34. Though it was a writ of prohibition that was asked for, if it is found that the issue of notice under section 34 (1) (b) did not confer any jurisdiction on the Income‑tax Officer to reopen the assessment of the assessee, the appropriate remedy would be the issue of a writ of certiorari to set aside the notice issued under section 34 (1) (b) and the assessment that followed it.

The period of limitation prescribed for the initiation of the proceedings under section 34 (1) (b) is four years. The question is, what is the date from which that four year period has to be computed. The contention of the learned counsel for the assessee was that that period should be computed from the expiry of the assessment year in question, 1950‑51, and that, therefore, the four year period came to an end on March 31, 1955. Therefore, the notice served on the assessee on September 14, 1957, was beyond the prescribed period of limitation, and such a notice could not confer any jurisdiction on the Income‑tax Officer. That was con tention of the learned counsel for the petitioner. The learned counsel for the "Department contended alternatively (1) that the period of limitation should be computed from the close of the assessment year, in which the order under section 23‑A was passed, and (2) that no period of limitation was applicable at all, because, independent of section 34, under the very terms of section 23‑A as it stood in the relevant period, the notional dividend income of the assessee could be taken into consideration in computing the assessable income of the assessee.

In Spencer v. Income‑tax Officer ((1957) 31 I T R 107) this Court and occasion to go only into the question what the expression "year" in section 34 meant. It was construed as the assessment year, rejecting the contention of the assessee in that case that it was the accounting year. The further question, whether the decision in Navinchandra Mafatlal v. Commissioner of Income‑tax ((1955) 27 I T R 245) was correct, was left open.

In Navinchandra's case the Bombay High Court had pressed the view that the period of limitation would have to be computed only after an order under section 23‑A was passed. That question, however, was reconsidered by the Bombay High Court in Commissioner of Income‑tax v. Robert J. Sas ((1958) 34 I T R 222). Chagla, C. J., explained the scope of his earlier decision in Navinchandra's case and he said that the period of limitation to be computed under section 34 (1) was to be computed only with reference to the assessment year of the assessee or shareholder, and that the date on which an order under section 23‑A was passed as against the company would not be relevant in computing the period of limita tion, either for the assessment or for re‑assessment of the assessee, that is, the shareholder.

If we may say so with respect, we find ourselves in entire agreement with the reasoning and conclusion of Chagla, C. J., in Commissioner of Income‑tax v. Robert J. Sas. Section 34 (1) refers only to the assessee, and the year with which the assessee is concerned, the assessment year of that assessee. There is no scope for importing into section 34 (1) any further consideration. It should be remembered that a necessity to reopen assessment under section 34 may arise under various circumstances, one of which is an order under section 23‑A. Therefore, that the order under section 23‑A was passed at a given point of time may have no relevance in determining see period of limitation permissible and prescribed under section 34 (1) of the Act. If, for instance, discovery or information was beyond four years, that would not extend the period of limitation. Even as a result of discovery, action under section 34 (1) would be permissible only within the period of limitation prescribed thereunder.

Learned counsel for the Department next contended that under the terms of section 23‑A, as it stood in the relevant period, re‑assessment cou3id be undertaken without recourse to section 34. That contention has been repelled more than once. In Spencer's case as well as in other cases, decided under section 23‑A, it has been pointed out that section 23‑A is not concerned with any assessment or re‑assessment. It is only a procedural section, and, if an order under section 23‑A is passed the question of assessment of the shareholder will have to be taken up‑either it should be his original assessment, or it should be reopening of the original assessment if it has been closed under any of the provisions of the Act. In the present case, the assessment was reopened by recourse to section 34 (1) (b) of the Act. Without recourse to section 34, the finality of the assessment of the assessee in this case could not have been avoided. Section 23‑A did not provide for it. It should be remembered that, at that stage, the shareholder as such does not come into the picture. He is not entitled to a notice before an order is passed under section 23‑A, and he cannot himself challenge the validity of that order by an appeal. It is only the company that is entitled to a notice and to an appeal. Acceptance of the contention of the learned counsel for the Department that without recourse to section 34 assessment or re -assessment could be effected under the term of section 23‑A, would lead to this position, that assessment or re‑assessment could be done and completed without any notice to the shareholder. That is wholly opposed to the scheme of the Income‑tax Act. At any rate, it is wholly opposed to the scheme of the Income‑tax Act as explained in the decisions of this Court and other Courts. We have no hesitation in rejecting the contention that the Department had a right independent of section 34 under the term of section 23‑A itself, to reassess the assessee shareholder.

We are not called upon to consider in this case whether, in the circumstances of this case, the assessment could have been reopened under section 35. It was brought to our notice that action under section 35 was contemplated but was dropped. Therefore we refrain from saying anything about the applicability of section 35 or about the appropriate period of limitation, had action been taken under section 35 of the Act.

Since the four‑year period of limitation for initiating proceedings under section 34 (1) (b) ran out on March 31, 1955, and since the notice under section 34 (1) (b) was served upon the assessee, only after expiry of that period, and further since the service of a valid notice is a condition precedent to the assumption of jurisdictions under section 34 of the Act, we have to hold that the Income‑tax Officer had no jurisdiction to reopen the assessment or to reassess the assessee, even though there was a valid order under section 23‑A of the Act. Since the notice itself was issued beyond the period of limitation, it has to be set aside by the issue of a writ of certiorari. The writ of certiorari will also be directed to set aside the order of assessment on the basis of assessment completed after the issue of invalid notice served on the assessee on September 14, 1957.

The petition is allowed with costs ; though it is the writ of prohibition that has been asked for, it is the writ of certiorari that will issue in accordance with the directions given above. Counsel's fee Rs. 250.

Petition allowed.

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