1967 (4) TMI 17 - SC - Income Tax

Whether the ITO is competent to initiate the proceeding under s. 34(1)(b) of the IT Act, 1922 for bringing to tax the excessive rebate granted to the assessee - matter is remanded

Summary

Issues Involved:
1. Competence of the Income-tax Officer to initiate proceedings under section 34(1)(b) of the Indian Income-tax Act, 1922.
2. Whether the Tribunal was right in entertaining the assessee's contention relating to the applicability of section 34(1)(b) under rule 27 of the Appellate Tribunal Rules.
3. Validity of the reassessment proceedings initiated under section 34(1)(b) on the ground of excessive relief.

Issue-wise Detailed Analysis:

1. Competence of the Income-tax Officer to Initiate Proceedings under Section 34(1)(b):
The Income-tax Officer, Central Circle, Madras, had passed orders under section 23A of the Indian Income-tax Act, 1922, deeming certain amounts as dividends distributed among shareholders for the assessment years 1946-47 to 1951-52. The company subsequently resolved to distribute Rs. 3,54,716 as dividends, which had been deemed distributed under section 23A. The Income-tax Officer later issued a notice under section 34(1)(b) to reopen the assessment for the year 1956-57, contending that excessive relief had been granted. The High Court observed that the plea of the company that reassessment proceedings under section 34(1)(b) on the ground of "excessive relief" could not be initiated must be accepted. However, it held that proceedings under section 34(1)(b) could be initiated when rebate in the payment of super-tax was granted without reducing it as required by the Finance Act, 1956, thus assessing income at too low a rate. The Supreme Court reframed the question to determine whether the Income-tax Officer was competent to initiate proceedings under section 34(1)(b) for bringing to tax the excessive rebate granted to the assessee.

2. Whether the Tribunal was Right in Entertaining the Assessee's Contention Relating to the Applicability of Section 34(1)(b) under Rule 27 of the Appellate Tribunal Rules:
The Tribunal entertained the assessee's contention regarding the applicability of section 34(1)(b) under rule 27 of the Appellate Tribunal Rules. The High Court decided in favor of the company on this issue, indicating that the Tribunal was justified in its approach. The Supreme Court did not find any fault with the Tribunal's procedure, emphasizing that the first question raised related to a matter of procedure and did not imply that the Income-tax Officer lacked the power to initiate proceedings under section 34(1)(b).

3. Validity of the Reassessment Proceedings Initiated under Section 34(1)(b) on the Ground of Excessive Relief:
The High Court held that the reassessment proceedings under section 34(1)(b) on the ground of "excessive relief" could not be sustained based on the precedent set by the Bombay High Court and affirmed by the Supreme Court in the Simplex Mills case. However, the High Court expanded the scope of the enquiry to include whether the income was assessed at too low a rate, ultimately holding that proceedings could be initiated on this ground. The Supreme Court agreed with the High Court that the rebate of tax and the reduction of such rebate are matters of measure or standards of rate, and an assessee failing to pay the full measure of tax is assessed at too low a rate. However, the Supreme Court emphasized that the High Court should have addressed all aspects of the validity of the initiation of the proceedings under section 34(1)(b), including whether the notice served was valid. The case was remanded to the High Court to determine the validity of the proceedings based on the notice issued, with the High Court directed to call for a supplementary statement of the case if necessary.

Conclusion:
The Supreme Court remanded the case to the High Court to determine whether the proceedings were validly initiated on the notice issued against the company. The High Court was instructed to consider the form and contents of the notice and the validity thereof, and to dispose of the third question in light of the reasons set out in the Supreme Court's judgment. The costs of the appeal were to be costs in the High Court.