1960 (5) TMI 42 - HC - Income Tax

Summary

Issues Involved:
1. Legality of notices issued under Section 34 of the Income Tax Act.
2. Existence of an association of persons at the time of notice issuance.
3. Double assessment of the same income.
4. Validity of notices not addressed to the principal officer.
5. Requirement of prior assessment under Section 23 for issuing notices under Section 34.
6. Timeliness of the notice under Section 34.
7. Validity of notices under Rule 6-B of the Income Tax Rules.

Issue-wise Detailed Analysis:

1. Legality of Notices Issued under Section 34 of the Income Tax Act:
The court examined whether the Income Tax Officer (ITO) had "definite information" at the time of issuing the notice which he did not possess during the original assessments. The petitioners argued that all facts were known to the ITO when the original assessments were made, and thus, Section 34 could not be used merely to review or revise his opinion. The court noted that the language of Section 34 had changed over time and emphasized that the ITO must have a "reasonable belief" that income had escaped assessment. The ITO's belief was based on new facts that came to light regarding the distribution of profits among various firms, which were not known during the original assessments. The court found it premature to quash the notices at this stage, as the facts were still in dispute and needed further investigation.

2. Existence of an Association of Persons at the Time of Notice Issuance:
The petitioners contended that no association of persons existed when the notices were issued. The court referred to Section 44 of the Income Tax Act, which provides for the assessment of a dissolved firm or association. The ITO had issued notices to 29 persons who were believed to be part of the association. The court held that the ITO was within his rights to issue notices to these persons and determine the constitution of the association during the assessment proceedings.

3. Double Assessment of the Same Income:
The petitioners argued that the same income could not be assessed twice, once in the hands of the partners and again as an association of persons. The court referred to the case of Joti Prasad v. Income-tax Officer, Mathura, where it was held that once income is assessed in the hands of individual members, it cannot be reassessed in the hands of the association. However, the court distinguished the present case, noting that the original assessment was made on certain persons claiming to be partners of the firm, and not on the association of persons. Therefore, the ITO was justified in issuing notices to assess the association of persons.

4. Validity of Notices Not Addressed to the Principal Officer:
The petitioners argued that the notices were invalid as they were not addressed to the principal officer of the association. The court referred to Section 63(2) of the Income Tax Act, which allows notices to be addressed to any member of the firm or the principal officer of the association. The court held that the provision is an enabling one and does not bar the issuance of notices to all members of the association. Therefore, the notices were valid.

5. Requirement of Prior Assessment under Section 23 for Issuing Notices under Section 34:
The petitioners contended that a notice under Section 34 could only be issued if an assessment had already been made under Section 23. The court clarified that Section 34 allows for the assessment of income that has escaped assessment or has been under-assessed. It is applicable even if no prior assessment has been made, as long as the income has escaped assessment. Therefore, the objection was not upheld.

6. Timeliness of the Notice under Section 34:
The petitioners argued that the notice was barred by time. The court noted that if the ITO sought to tax the registered firm, the bar of four years limitation might apply. However, since no return had been filed by an association of persons and no assessment had been made on that body, there was no time limit for issuing the notice. Therefore, the objection was dismissed.

7. Validity of Notices under Rule 6-B of the Income Tax Rules:
The petitioners challenged the notices issued under Rule 6-B, arguing that there was no remedy available against the order passed by the ITO. The court held that the issuance of a notice under Rule 6-B does not result in an immediate assessment. The firm could challenge the propriety of the order cancelling registration during the assessment proceedings. Therefore, the court found nothing inherently wrong with the notices under Rule 6-B.

Conclusion:
The court dismissed the petitions, holding that the ITO had the jurisdiction to issue the notices under Section 34 and Rule 6-B. The facts regarding the legal status of the body carrying on business as Messrs. Rup Narain Ram Chandra were still in dispute and needed further investigation. The court assessed costs at Rs. 500/- in both cases and discharged the stay orders.