1964 (1) TMI 4 - SC - Income Tax

Whether the view of the High Court was that the provisions of the second proviso to section 34(3) would not apply to a case where the escaped assessment is of an amount less than a lakh of rupees and more than eight years have elapsed? Held that - Apparently the High Court has overlooked the fact that the second proviso to sub-section (3) of section 34 was amended first by Act 25 of 1953 and then by Act 18 of 1956. By the amendment of 1953 for the word sub-section the words section limiting the time within which any action may be taken or any order assessment or reassessment may be made were substituted. By the amendment of 1956 it now stands as already quoted by us. If the proviso in its present form applies here it would govern the whole of section 34(1) and would consequently include even an escaped assessment with respect to which limitation is provided in clause (ii) of the first proviso to section 34(1). The result in our opinion would be the same even if the case were to fall to be governed by the Amending Act of 1953 though not by that of the Amending Act of 1956. We may add that the amendment of 1953 took effect from April 1 1953 and that of 1956 from April 1 1956. For the reasons stated above the decision of the High Court is clearly wrong.Appeal allowed. Case remanded.

Summary

Issues Involved:
1. Validity of the notice issued under section 34(1)(a) of the Indian Income-tax Act, 1922.
2. Compliance with the conditions laid down in the proviso to section 34(1).
3. Application of the second proviso to section 34(3) regarding limitation.

Issue-wise Detailed Analysis:

1. Validity of the notice issued under section 34(1)(a) of the Indian Income-tax Act, 1922:
The appellant issued a notice to the respondents under section 34(1)(a) concerning an escaped income of Rs. 47,595 for the assessment year 1944-45. The notice was issued on March 27, 1957. The respondents contended that the notice was invalid because it was issued after the expiry of the assessment year and without obtaining the sanction of the Central Board of Revenue as required by clause (iii) of the proviso to section 34(1). The Supreme Court noted that under section 34(1)(a), the Income-tax Officer could issue a notice if he had reason to believe that the assessee had failed to make a full and accurate declaration of income, resulting in escaped income.

2. Compliance with the conditions laid down in the proviso to section 34(1):
The High Court observed that the notice did not comply with the two conditions in the proviso to section 34(1). The first condition was that a notice shall not be issued for any year prior to the year ending on March 31, 1941. The second condition was that if eight years had elapsed, the notice should not be issued for an escaped income aggregating to less than one lakh of rupees. The High Court held that since the escaped income was less than one lakh of rupees and more than eight years had elapsed, the notice was invalid. The Supreme Court agreed with the High Court's interpretation but clarified that the sanction of the Central Board of Revenue was only necessary where the notice was issued under clause (ii) of the proviso. Since the notice in question was issued under clause (ii), the sanction of the Central Board of Revenue was not required, and the notice was valid.

3. Application of the second proviso to section 34(3) regarding limitation:
The High Court held that the second proviso to section 34(3) did not apply to cases where the escaped assessment was less than one lakh of rupees and more than eight years had elapsed. The Supreme Court disagreed, noting that the second proviso to section 34(3) had been amended by Acts in 1953 and 1956. The amended proviso stated that nothing in the section limiting the time for taking action or making an assessment or reassessment would apply to a reassessment made under section 27 or to an assessment or reassessment made in consequence of or to give effect to a finding or direction in an order under specified sections. The Supreme Court held that the second proviso to section 34(3) applied to the whole of section 34(1), including escaped assessments with respect to which limitation was provided in clause (ii) of the first proviso to section 34(1). Therefore, the notice issued by the Income-tax Officer was valid under the second proviso to section 34(3).

Conclusion:
The Supreme Court concluded that the decision of the High Court was incorrect. The appeal was allowed, the order of the High Court was set aside, and the case was remanded to the High Court for consideration of the other points raised by the respondents but not heard. The costs were to abide by the result of the writ petition before the High Court.