1962 (11) TMI 85 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the reassessment proceedings under section 34(1)(b) of the Indian Income-tax Act, 1922.
2. Applicability of the Merged States (Taxation Concessions) Order, 1949.
3. Rectification under section 35 of the Indian Income-tax Act, 1922.

Analysis:

1. Validity of the reassessment proceedings under section 34(1)(b) of the Indian Income-tax Act, 1922:

The primary issue was whether the Income-tax Officer (ITO) was justified in initiating reassessment proceedings under section 34(1)(b). Section 34(1)(b) allows the ITO to reassess if he has "in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment, or have been under-assessed, or assessed at too low a rate." The court noted that when the original assessment order was passed on 28th February 1950, the ITO already had information about the income received by the assessee in the former Indian Union. This information was confirmed by the assessee on 21st May 1950. The court observed that if the original assessment order had stood alone, there would be no basis for invoking section 34 as there was no under-assessment or escaped income. The right to invoke section 34 arose only after the rectification order under section 35 was passed on 27th July 1950, which assessed the income at Baroda rates. The court concluded that the ITO could not use the information he already had before the rectification to justify reassessment under section 34(1)(b). The information must be subsequent to the rectified order for the ITO to have the right to take action under section 34(1)(b).

2. Applicability of the Merged States (Taxation Concessions) Order, 1949:

The Merged States (Taxation Concessions) Order, 1949, was promulgated to provide concessional tax rates for income accruing or arising in merged states. The ITO initially did not apply this order, leading the assessee to appeal. During the rectification process, the ITO acknowledged the applicability of the concessions order but found that part of the income was taxable at Indian Union rates. This recognition led to a reassessment which the assessee contested, arguing that the ITO erred in not applying the concessions order initially. The court observed that the ITO had information about the income's nature and its taxability at different rates before the rectification, which should have been considered initially.

3. Rectification under section 35 of the Indian Income-tax Act, 1922:

Section 35 allows rectification of any "mistake apparent from the record." The ITO used this provision to rectify the original assessment by applying the concessional rates of the Merged States Order. However, the rectification led to a situation where part of the income was assessed at too low a rate, prompting the ITO to initiate reassessment under section 34. The court highlighted that the ITO should not use section 35 to create a situation that justifies reassessment under section 34. The rectification order must be based on apparent mistakes without launching fresh inquiries or investigations. The court found that the ITO, by rectifying the assessment under section 35, had all the necessary information to avoid under-assessment and should not have resorted to section 34 for reassessment.

Conclusion:

The court held that the ITO was not justified in making a reassessment under section 34(1)(b) as the information was already in his possession before the rectification order. The reassessment was invalid because the ITO could not rely on pre-existing information to justify reassessment under section 34(1)(b). The question was answered in the negative, favoring the assessee, and costs were awarded to the assessee.