1981 (4) TMI 40 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Appellate Assistant Commissioner (AAC) in giving directions regarding strangers to the proceedings.
2. Validity of action taken by the Income-tax Officer (ITO) under section 34(1)(b) read with the proviso to sub-section (3) of section 34.
3. Justification of action under section 34(1)(a) of the Income-tax Act.
4. Validity of action under section 35 of the Income-tax Act for the assessment years 1950-51 and 1951-52.

Issue-wise Detailed Analysis:

1. Jurisdiction of the AAC in Giving Directions Regarding Strangers to the Proceedings:

The AAC, while dealing with the assessment of Lady Goolbai, directed that the income of the estate of Sir Homi Mehta should be assessed in the hands of the executors. The Tribunal found that the AAC had no jurisdiction to give such a direction against the executors of Sir Homi Mehta, as they were strangers to the proceedings. The Supreme Court's decision in ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335 established that the AAC could not give directions against parties not involved in the appeal. The AAC's direction was beyond his jurisdiction and invalid.

2. Validity of Action Taken by the ITO Under Section 34(1)(b) read with the Proviso to Sub-section (3) of Section 34:

The ITO issued notices under section 34(1)(b) for reassessment, relying on the AAC's direction. However, the Supreme Court in Prashar v. Vasantsen Dwarkadas [1963] 49 ITR 1 held the second proviso to section 34(3) as unconstitutional to the extent it allowed reassessment beyond the period of limitation for persons other than the assessee. The Tribunal upheld this view, making the reassessment notices invalid. The connection between Lady Goolbai and the executors was not intimate enough to invoke the second proviso to section 34(3) as per the Supreme Court's interpretation in Murlidhar Bhagwan Das' case.

3. Justification of Action Under Section 34(1)(a) of the Income-tax Act:

The Tribunal held that the ITO could not justify the reassessment under section 34(1)(a) as the executors had disclosed all material facts necessary for assessment. The ITO initially chose to assess the income in the hands of Lady Goolbai, not due to any non-disclosure by the executors. The Tribunal found no evidence of suppression of income by the executors, thus section 34(1)(a) was not applicable.

4. Validity of Action Under Section 35 of the Income-tax Act for the Assessment Years 1950-51 and 1951-52:

The Tribunal rejected the revenue's contention that the reassessment could be treated as rectification under section 35. The initial assessment was based on a deliberate decision by the ITO to tax the income in the hands of Lady Goolbai. The subsequent finding in Lady Goolbai's case did not constitute an error apparent on the face of the record. Therefore, section 35 could not be invoked to justify the reassessment.

Conclusion:

The court answered all four questions in the affirmative and against the revenue, affirming the Tribunal's decisions. The AAC had no jurisdiction to direct assessments against the executors, the reassessment notices under section 34(1)(b) were invalid, section 34(1)(a) was not applicable, and section 35 could not be used to justify the reassessment. The revenue was ordered to pay the costs of the reference.