1967 (3) TMI 16 - SC - Income Tax

Whether the reassessment under section 34 of the Act is valid in law ? Held that - The High Court was in error in holding that a finding or direction by an appellate authority in an order relating to assessment of one year may warrant the avoidance of the bar of limitation under section 34(1) of the Act against initiation of proceedings for assessment for another assessment year against the same assessee or against another assessee. The Appellate Assistant Commissioner may hold, on the evidence, that the income shown by the assessee was not the income for the relevant year and thereby exclude that income from the assessment of the year under appeal. The finding in that context is that the income did not belong to the relevant year. He may incidentally find that the income belonged to another year, but that is not a finding necessary for, the disposal of an appeal in respect of the year of assessment in question. Thus a finding within the second proviso to section 34(3) must be necessary for giving relief in respect of the assessment of the year in question. Appeal allowed.

Summary

Issues:
Validity of reassessment under section 34 of the Income-tax Act.

Detailed Analysis:
The case involved a reassessment under section 34 of the Income-tax Act. The appellant claimed to have deposited Rs. 10,000 with an individual out of Rs. 16,000 brought back from Malaya. The Income-tax Officer assessed Rs. 16,000 as income from undisclosed sources for the assessment year 1947-48. The Appellate Assistant Commissioner modified the order, taxing only the Rs. 10,000 deposited. However, the Appellate Tribunal later canceled the assessment, accepting the appellant's version that the entire amount was brought back in 1946 and not taxable in 1947-48.

The Income-tax Officer initiated proceedings under section 34(1)(a) for the assessment year 1946-47 based on the finding in the earlier assessment. The assessee argued that the proceedings were time-barred as eight years had passed and the amount was less than Rs. 1 lakh. The department and Tribunal rejected this plea, citing the second proviso to section 34(3) as saving the assessment. The High Court agreed, stating that the provision allowed proceedings based on findings or directions from certain sections.

The Supreme Court held that the High Court erred in interpreting the second proviso to section 34(3). Referring to a previous case, the Court clarified that findings or directions must relate to the assessment year under appeal, not another year. The Court emphasized that a finding must be necessary for giving relief in the relevant assessment year, not incidental to another year's assessment. The Court rejected the argument that a mere finding, not a direction, could remove the limitation bar under section 34.

The Court highlighted that a finding within the second proviso must be essential for providing relief in the relevant assessment year. Quoting earlier judgments, the Court emphasized that a finding should address material questions necessary for the final decision in the appeal. Consequently, the Court held that the High Court's answer to the question submitted by the Tribunal could not be upheld.

The appeal was allowed, and the question on the validity of reassessment under section 34 was answered in the negative. The appellant was awarded costs in both the Supreme Court and the High Court.