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TMI Blog1964 (2) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... f Saurashtra. The Indian Income-tax Act was made applicable to the State of Saurashtra from 1st April, 1950, and assessment of the firm for the assessment year 1950-51 was made under the Act. The accounting year of the firm for the assessment year 1950-51 was taken as the calendar year 1949. The Income-tax Officer by an order of assessment dated 22nd April, 1951, determined the total income of the firm at ₹ 75,964 and assessed the firm on such total income as an unregistered firm. It appears that the firm had shown its entire income as arising in Part B State and the Income-tax Officer, therefore, granted rebate to the firm in respect of the entire income under the Part B States (Taxation Concessions) Order, 1960. The Income-tax Officer thus determined the tax payable by the firm at an aggregate sum of ₹ 9,133-2-0 which was paid by the firm on 24th May, 1951. This assessment was subsequently reopened by the Income-tax Officer and it is the order of reassessment made by the Income-tax Officer as a result of reopening this assessment that has given rise to the main controversy between the parties. We will presently refer to the facts relating to the reopening of this asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arded as having arisen in Part B State. The Income-tax Officer accordingly gave rebate to the firm only in respect of 15 per cent. of he total income. It may be pointed out that for this assessment year a return was filed by the firm, though long after the period allowed by the notice under section 22(2) which was served on the firm by the Income-tax Officer, but the firm did not appear in response to the notice under section 22(4) and the assessment made by the Income-tax Officer was, therefore, a best judgment assessment under section 23(4). The firm being aggrieved by the order of assessment preferred an appeal before the Appellate Assistant Commissioner. The notice of hearing of the appeal was served on one of the partners of the firm, namely, Gopikrishnan Tolat some time in July, 1958. In the meantime, however, the business of the firm was closed and the firm was dissolved in or about the end of Samvat year 2011 or the beginning of Samvat year 2012 which would be somewhere around November or December, 1955. Gopikrishan Tolat, therefore, sent a telegram to the Appellate Assistant Commissioner on or about nth July, 1958, asking for an adjournment on the ground that the firm h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the present petition. On 10th February, 1959, the Income-tax Officer issued a notice under section 34(1)(a) of, the Act in respect of the assessment year 1950-51. Since considerable argument turned on the true nature and effect of the notice, it would be desirable to reproduce the notice in extenso. The notice was in the following terms : To Shri Kesrimal Bhunch, Partner of M/s. Dhrangadhra Salt Trading Co., Dhrangadhra, 48, Yaswant Gunj, Indore-City. I have reason to believe that your income assessable to income-tax for the year ending 31st of March, 1951, has : (a)......... (b)......... (c)been assessed at too low a rate, (d)......... (e).......... I therefore propose to reassess the said income that has- (a).......... (b).......... (c)been assessed at too low a rate, (d).......... (e)........... I should request you to deliver to me not later than 25-3-1959 or within 35 days of the receipt of this notice, a return in the attached form of your total income and total world income assessable for the said year ending 31st of March, 19.... This notice is being issued after obtaining the necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the firm to pay the balance of ₹ 16,025.15 nP. were, like the aforesaid two notices, served only on Kesrimal Bhunch. None of the petitioners was served with the order of reassessment or the notice of demand nor did any of the petitioners come to know about them until some time in December, 1960. The Income-tax Officer also issued a notice dated 10th September, 1959, under section 28(3) to Shri Kesrimal Bhunch, Partner of M/s. Dhrangadhra Salt Trading Company (U.R.F.), Dhrangadhra, 48 Yaswant Gunj, Indore-City. By this notice the Income-tax Officer called upon Kesrimal Bhunch to show cause why an order imposing penalty should not be made against him under section 28(1) for non-compliance with the notices issued under sections 34 and 22(4). The notice was served on Kesrimal Bhunch on 13th December, 1959, but Kesrimal Bhunch did not appear in pursuance of the notice or offer any explanation. The Income-tax Officer, therefore, passed an ex parte order on 19th December, 1960, imposing a penalty of ₹ 16,000 on the firm under section 28(1)(a) for non-compliance with the notice under section 22(2) read with section 34 and section 22(4). According to the petitioners i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of reassessment. There were several grounds on which the validity of the order of reassessment was attacked on behalf of the petitioners but it is not necessary to refer to all of them since there is one ground on which we think the challenge to the legality of the order of reassessment must succeed. That ground is that the proceedings taken by the Income-tax Officer under section 34(1)(a) were invalid because the notice required to be issued under that sub-section was not issued against the firm of Messrs. Dhrangadhra Salt Trading Company. The Income-tax Officer obviously purported to act under section 34(1)(a) in making the order of reassessment. Section 34(1)(a) provides, inter alia, that If the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued to the assessee ; but who is the assessee contemplated by that sub-section to whom the notice is required to be issued ? The language of section 34(1)(a) affords a clear answer to this inquiry. When the Income-tax Officer has reason to believe that income, profits or gains of an assessee chargeable to income-tax have escaped assessment or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief by reason of the omission or failure on the part of the assessee to make a return of his income or to disclose fully and truly all material facts necessary for his assessment, he may assess or reassess such income, profits or gains after giving notice to the assessee. The assessee to whom the notice is required to be issued is, therefore, the assessee whose income, profits or gains have escaped assessment or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief in the year of assessment and the notice is for assessment or reassessment of such income, profits or gains. When a firm is assessed as an unregistered firm in the original assessment proceedings, the notice under section 34(1)(a) m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalysing the provisions of section 34(1)(a) he said that in the case of a firm whose income is sought to be reassessed under section 34(1)(a), the notice must be issued against the firm owing to whose failure or omission income for the year of assessment has escaped assessment. This decision was taken in appeal and was subsequently affirmed by a Division Bench of the Bombay High Court in Ramnivas Hanumanbux Somani v. Venkataraman [1961] 43 ITR 152 . Apart from these decisions which support us in the view we have taken as regards the requirement of the notice under section 34(1)(a), the decision of the Supreme Court in Narayana Chetty v. Income-lax Officer, Nellore [1959] 35 ITR 388 , 395 ; [1959] Supp. 1 SCR 189, also contains observations which fortify us in that view. In that case the firm which was sought to be reassessed under section 34(1)(a) was a registered firm and the argument which was, therefore, advanced on behalf of the assessee was that the notice could be issued only against the partners of the firm and not against the firm and, since the notice impugned there was issued against the firm, it was not a valid notice. This argument was rejected by the Supreme Court whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of the notice, could not, therefore, stand in the way of the Income-tax Officer proceeding to reassess the income of the firm, if he was otherwise entitled to do so. Turning now to the notice which has been issued in the present case the learned Advocate-General, as we have pointed out above, contended that the notice dated 10th February, 1959, was a valid notice issued under section 34(1)(a) and that the proceedings for reassessment initiated by that notice were valid proceedings terminating in a valid order of reassessment. This contention can succeed only if the notice relied on by the learned Advocate-General can be said to be a notice issued against the firm. The notice must be a notice for reassessing the income of the firm on the ground that such income was assessed at too low a rate by reason of the omission or failure of the firm specified in section 34(1)(a). Is this test satisfied by the notice dated 10th February, 1959 ? We think not. The notice is addressed to Shri Kesrimal Bhunch, partner of Messrs. Dhrangadhra Salt Trading Company at 48 Yaswant Gunj, Indore City. Prima facie, therefore, the notice is issued against Kesrimal Bhunch and not against the firm. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a valid notice under that subsection was that the person on whom the notice was served must know what was sought to be done by the Income-tax Officer. The notice, in the present case, argued the learned Advocate-General, was addressed to Kesrimal Bhunch as partner of Messrs. Dhrangadhra Salt Trading Company, Dhrangadhra, and was issued by the Income-tax Officer, Ward-B, Surendranagar. These two circumstances, according to the learned Advocate-General, clearly showed that what was proposed to be done by the Income-tax Officer was reassessment of the income of the firm and not of the income of Kesrimal Bhunch. The argument was that Kesrimal Bhunch was a resident of Indore and how could there be a notice for his reassessment by the Income-tax Officer, B-Ward, Surendranagar ? The notice, therefore, clearly indicated that it was a notice against the firm which was within the jurisdiction of the Income-tax Officer, B-Ward, Surendranagar. These circumstances do not in our opinion assist the argument of the learned Advocate-General. We agree with the learned Advocate-General that we must have regard to the substance of the notice. We must read the notice as a whole. But we certainly canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the firm it can be served on one of the partners by addressing the envelope containing the notice to such partner. Notice may even be served personally on one of the partners. But whatever be the mode adopted for effecting service on a partner, the notice must be against the firm and it must seek to reassess the income of the firm which has either escaped assessment or has been assessed at too low a rate or has been the subject of excessive relief. The learned Advocate-General also put forward an argument that all that section 34(1)(a) required was that the notice must be served on the assessee and that it did not say that the notice must be against the assessee or that it must be in any particular form. Now it is undoubtedly true that there is no statutory form prescribed for a notice under section 34(1)(a) but the sub-section does say that the notice must, contain all or any of the requirements which are included in a notice under section 22(2) and the latter part of the sub-section clearly shows that, once the notice is issued, the provisions of the Act shall apply as if the notice were a notice issued under section 22(2). The notice under section 22(2) is a notice iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm within the meaning of section 34(1)(a). The form of the notice in that case clearly indicated that what was sought to be done by the Income-tax Officer by issuing the notice was to reassess the income of the firm. But whether a notice in a particular case is a proper notice or not must depend on the facts of each case and a particular form of notice used in one case cannot possibly assist us in arriving at a conclusion as regards the validity of a notice issued in another case. One thing however does appear from the judgment in this case, namely, that prior to the issue of the impugned notice a previous notice was addressed to the petitioner for and on behalf of the firm in which it was stated that the Income-tax Officer had reason to believe that the income had been under-assessed and that he proposed to reassess such income and the petitioner was called upon to file his return and this notice was struck down by the court as not being a proper notice against the firm under section 34(1)(a). The case before us is a similar case. The learned Advocate-General relied on a decision of the Madras High Court in Commissioner of Income-tax v. K.M.N.N. Swaminathan Chettiar [1947] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment made by the Income-tax Officer must consequently be held to be illegal and void. If this be so, it must follow that the orders of penalty in respect of the assessment year 1950-51 were also illegal and void since they were founded upon the reassessment proceedings. That takes us to the next question as regards the validity of the order imposing penalty of ₹ 3,000 on the firm in respect of the assessment year 1952-53. There were two grounds on which this order of penalty was challenged by Mr. Trivedi on behalf of the petitioners. There is in our opinion no substance in any of those grounds. The first ground which he urged was that the return was in fact accepted by the Income-tax Officer and the Income-tax Officer was, therefore, not entitled to impose any penalty for non-compliance with the notice under section 22(2). This contention overlooks the fact that the notice under section 22(2) required the firm to file its return within a certain period and the return was admittedly not filed by the firm within such period. There was, therefore, clearly non-compliance with the notice under section 22(2). It is no doubt true that the return was subsequently filed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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