1968 (11) TMI 17 - HC - Income Tax

Proceedings under section 34 to assess the firm - notice under section 34 was issued after the expiry of the time limit - validity

Issues Involved:
1. Period of Limitation for Assessments
2. Legality of Notices under Section 34(1) of the Indian Income-tax Act, 1922

Detailed Analysis:

1. Period of Limitation for Assessments:

The first issue pertains to whether the assessments made under section 34 against the assessee-firm for the assessment years 1951-52, 1952-53, and 1953-54 were within time and legal. The Appellate Assistant Commissioner, while dealing with the appeals of the Hindu undivided family, directed the Income-tax Officer to start proceedings under section 34 of the Act and make assessments on the assessee-firm. The notices under section 34(1) were issued on 12th January 1959, after the expiry of four years from the last of the three assessment years, 1953-54.

The second proviso to section 34(3) of the Act, as amended by Act No. XXV of 1953, states: "Provided further that nothing contained in this section limiting the time within which any action may be taken or any order, assessment or reassessment may be made, shall apply to a reassessment made under section 27 or to an assessment or reassessment made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under section 31, section 33, section 33A, section 33B, section 66 or section 66A."

The Supreme Court in the case of Income-tax Officer, 'A' Ward, Sitapur v. Murlidhar Bhagwan Das clarified that the expression "any person" must be confined to a person intimately connected with the assessment of the year under appeal. This interpretation was reaffirmed in the case of Daffadar Bhagat Singh v. Income-tax Officer. Applying this principle, it was held that the direction given by the Appellate Assistant Commissioner to assess the unregistered firm was covered by the second proviso to section 34(3), and thus, the ordinary period of limitation prescribed under section 34 would not apply to the consequential assessments of the firm.

2. Legality of Notices under Section 34(1) of the Indian Income-tax Act, 1922:

The second issue concerns whether the Income-tax Officer was competent to issue notices under section 34(1) for the three assessment years in question. The assessee-firm had already filed returns for the respective assessment years, but the Income-tax Officer did not act on these returns and included the income in the assessments of the Hindu undivided family.

The Supreme Court in Commissioner of Income-tax v. Ranchhoddas Karsondas held that when a return has been filed by an assessee, there is neither an omission nor a failure on the part of the assessee, nor is there any question of income escaping assessment. Therefore, a notice under section 34(1) is invalid. Similarly, in Commissioner of Income-tax v. S. Raman Chettiar, the Supreme Court held that it was not open to the Income-tax Officer to disregard a return filed by the assessee and issue a notice under section 34.

The principle established by these decisions is that once a valid return has been filed, the proceedings in assessment commence, and income cannot be said to have escaped assessment without completing the assessment. Thus, the Income-tax Officer was not competent to issue the notices under section 34(1) on 12th January 1959.

Conclusion:

The assessments made by the Income-tax Officer in pursuance of the notices under section 34(1) were within time due to the applicability of the second proviso to section 34(3). However, they were not legal and valid as the Income-tax Officer was not competent to issue the notices under section 34(1) after the assessee had already filed valid returns. The assessee will get costs from the Commissioner of Income-tax assessed at Rs. 200.

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