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PETITIONER: COMMISSIONER OF INCOME-TAX, CALCUTTA

       Vs.

RESPONDENT: BIDHU BHUSHAN SARKAR (DEAD) THROUGH HIS LEGAL REPRESENTATIVE

DATE OF JUDGMENT: 03/10/1966

BENCH: BHARGAVA, VISHISHTHA BENCH: BHARGAVA, VISHISHTHA SHAH, J.C. RAMASWAMI, V.

CITATION:  1967 AIR  916            1967 SCR  (1) 685

ACT: Income-tax  Act, 1922, ss. 5(7A), 34-Proceeding pursuant  to notice under s. 34 "filed" by Additional Income-tax  Officer as another proceeding for same year pending before Principal Income-tax  Officer-Latter issuing another notice  under  s. 34-Whether proceeding on first notice still  pending-Whether second   notice  and  assessment  thereafter   valid-Whether transfer under s. 5(7A) only possible when proceedings pend- ing-Notice  under s. 34 just before expiry of  eight  years- Assessment  completed  within  one  year  thereafter-Whether valid or barred by limitation.

HEADNOTE: In  proceedings  pursuant  to a notice under s.  34  of  the Income-tax  Act  1922 , the  Additional  Income-tax  Officer passed  an  order to the effect that the  income  should  be taken in the assessment on a second return for the same year pending  before the Principal Income-tax Officer, for  which there  was  another file and that the case  was,  therefore, "filed". The  Principal Officer, after issuing a notice under s.  34, passed  an assessment order, but in an appeal  against  that order, he himself pointed out that he had no jurisdiction to make  the  order.   The  Appellate  Assistant   Commissioner therefore set aside the assessment order.  The  Commissioner thereafter transferred the case from the Additional  Officer to  the Principal Officer.  The latter then  issued  another notice  to the under s. 34 and in pursuance of  that  notice passed an assessment order. The  assessee appealed against this order to  the  Appellate Assistant  Commissioner on the grounds, that (i) the  notice under S. 34 of the Principal Officer was invalid because the proceedings instituted on the first notice by the Additional Officer were still pending; and (ii) if the first notice  of the  Additional Officer was still effective, the  assessment made   was   barred  by  time.   The   Appellate   Assistant Commissioner  accepted  these contentions  and  allowed  the appeal  but the Tribunal reversed this decision.   The  High Court, on a ’reference held in favour of the assessee. On appeal to this Court, HELD : (i) In the circumstances of the case the word "filed"

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in  the  order of the Additional Officer was  equivalent  to "disposed  of", so that after that order no  proceedings  on the  basis  of  his  notice  remained  pending.   What   the Additional  Officer  intended  and did, in  effect,  was  to terminate  the  proceedings before him  without  making  any order  of  assessment  on  the  ground  that  the  order  of assessment  in  respect of the income in question  would  be made by the Principal Officer in the proceedings before him. [690 G-691 A] Esthuri  Aswathiah  v.  income-tax  Officer,  Mysore  State, [1961] 2 S.C.R. 911; 41, I.T.R. 539 and Haji Mohamed Main v. C.I.T. Calcutta, (Calcutta High Court, Income-tax  Reference No. 128 of 1961, judgment dated Feb. 23, 1955), referred to. 686 P. T.  Anklesaria  and Ors. v. C.I.T.,  Bombay  South,  35 I.T.R. 532, distinguished. Even  if  the  order of the Additional Officer  were  to  be regarded  as  invalid,  its effect could  not  be  that  the proceedings before him must be held to have continued  after that  order  was  made  by  him.   Even  an  invalid   order terminating proceedings has the effect of terminating  them; and in such a case the appropriate method for correcting the illegality  committed  is  to have  that  order  vacated  by appellate or other higher authorities having jurisdiction to intervene. [692 E-F] The High Court erred in holding that the proceedings on  the notice issued by the Additional Officer were pending on  the view that unless there was a case pending, there could be no transfer  of a case under s. 5(7A).  The word "case"  in  s. 5(7A)  is  used  in a  comprehensive  sense  including  both pending proceedings as well as proceedings to be  instituted in future. [693 B-D] (ii)The  order of assessment was not barred by  time.   The notice  having been validly issued by the Principal  Officer within the period of eight years prescribed by s. 34(3), the actual order of assessment could be made validly before  the expiry of one year from the date of the notice. [693 H]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 401 of 1965. Appeal from the judgment and order dated January 10, 1962 of the High Court at Calcutta in Income-tax Reference No. 22 of 1960. S.V. Gupte, Solicitor-General, N. D. Karkhanis and R.  N. Sachthey, for the appellant. A.K.  Sen,  P. K. Mukherjee and S. K. Banerjee,  for  the respondent. The Judgment of the Court was delivered by Bhargava,  J.- The assessee in the proceedings out of  which this  appeal has arisen was Bidhu Bhushan Sarkar,  who  died and  is  now represented in these  proceedings  through  his legal  representative.  The assessee used to be assessed  by the  Income-tax Officer of District 24 Parganas  in  Bengal. For  the  assessment  year 1947-48,  the  assessee  filed  a voluntary  return before the Income-tax Officer on  December 22, 1947, showing a net loss of Rs. 330/-.  This return  was filed  without any notice under S. 22(2) of  the  Income-tax Act having been served on him.  Before any proceedings could be completed on that return, there was change in territorial jurisdiction  and  as  a result,  the  assessee’s  place  of business  came  within the jurisdiction  of  the  Income-tax Officer District 1(2), Calcutta.  In this Income-tax Office, there were a number of Income-tax Officers.  The senior-most

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Income-tax  Officer  used  to be  designated  as  Income-tax Officer,  District  1(2), and was treated as  the  principal Income   tax  Officer  (hereinafter  referred  to  as   "the P.I.T.O."). Since there were a number of Addi- 687 tional  Income-tax  Officers,  there  was  distribution   of jurisdiction,and  the case of the assessee fell  within  the jurisdiction  of  the  8th  Additional  Income-tax  Officer, District 1(2) (hereinafter referred. to as "the  A.I.T.O."), and  consequently, came up before him. On January 16,  1949, the  A.I.T.O.  started  departmental  proceedings  with  the object of taking proceedings under s. 34, presumably because he  considered the voluntary return declaring a loss of  Rs. 330/- as invalid.  He thereafter issued a notice under s. 34 on  February 23, 1950.  In the meantime, on March 31,  1949, the assessee had filed another voluntary return for the same assessment  year  in  respect of his  income  from  military contracts  before  the  P.I.T.O.,  and  in  this  return  be declared  a  loss  of’  Rs.  11,33,940/-.   The  proceedings pending before the A.I.T.O. in pursuance of his notice dated 23rd February, 1950 came up, before him on the 4th February, 1952.   On that date, he passed’ the following  order  which may,  for convenience, be reproduced in full, as  this  case turns mainly upon the interpretation of this order :- "  Mr.  Kalipada  Bose, constituted  attorney,  Appears  and submits that the old return already submitted may be treated               to be submitted in response to notice under s.               34(1)(a).   The income should be taken in  the               assessment of the military contract income for               which  there  is another file.  The  case  is,               therefore, filed." The proceedings before the P.I.T.O. on the voluntary return, filed  by  the  assessee  on  the  31st  March,  1949,  were continuing,and in those proceedings he issued a notice under s.  23(2)  on  1st  August,  1950.   Subsequently,  on  12th February,  1952, he cancelled those proceedings on the  view that  a  voluntary  return  of  loss  was  not  valid,  took proceedings  under  s. 34, and issued a  notice  under  that section  on  the same day.  These proceedings. under  s.  34 culminated  in an order of assessment by the P.I.T.O.  under s. 34(4) passed on 31st January, 1953.  The assessee  filed’ an  appeal  against that order of assessment  and  when  the appeal  came up, the P.I.T.O. himself drew the attention  of the Appellate Assistant Commissioner to the fact that he had no  jurisdiction  over the assessee as there was  already  a file  of  the  assessee with  the  A.I.T.O.  He,  therefore, requested that the assessment should be set aside as it  was void  ab  initio.   The  Appellate  Assistant   Commissioner accepted  this  request  of  the  P.I.T.O.,  set   aside-the assessment on 7th December, 1955, and made a direction  that the  assessment could be completed according to law  by  the officer   having   proper  jurisdiction   over   the   case. Thereafter, on the 30th December, 1955, the Commissioner  of Income  tax  made  an order transfer-ring the  case  of  the assessee  from  the A.I.T.O. to the P.I.T.O.  There  was  an appeal  by  the  assessee  against  the  direction  of   the Appellate Assistant Commissioner that the assessment  should be completed 688 by  the  officer having proper jurisdiction over  the  case. That appeal was allowed by the Income-tax Appellate Tribunal on the 23rd April,1957, and the direction of the Appellate Assistant Commissionerwas set aside.  In the meantime, in pursuance  of  the  direction  of  the  Appellate  Assistant Commissioner  contained  in his order  dated  7th  December,

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1955, and the order of transfer by the Commissioner made  on 30th  December, 1955, the P.I.T.O., on 11th February,  1956, issued  a fresh notice under s. 34 to the assessee,  and  in pursuance  of  that notice, made an assessment on  2nd  May, 1956. Against  this  assessment  dated 2nd May,  1956,  there  was an   .appeal   to  the  Appellate   Assistant   Commissioner challenging the assessment on various grounds, one of  which was  that the notice dated 11th February, 1956 was  invalid, because  the proceedings ,instituted on the notice under  s. 34  dated 23rd February, 1950 were still pending, and  while these  proceedings had not terminated, another fresh  notice under  s. 34 could not be validly issued.  A further  ground was  that  if  the  notice  dated  23rd  February,  1950  is considered as still effective, when the assessment was  made on 2nd May, 1956, that assessment was barred by time.  These pleas were accepted by the Appellate Assistant Commissioner, but  the Income-tax Appellate Tribunal, on appeal,  reversed his  decision  and  decided  both  the  points  against  the assessee and in favour of the department.  On an application under s. 66(1), the Tribunal then referred the following two questions for opinion of the Calcutta High Court "(1) Were the notice u/s. 34 issued by the Principal Income- tax Officer on 11th February, 1956 and the assessment raised in pursuance thereof, valid in law, in view of the fact that the  proceedings  commenced  by the  8th  Addl.   Income-tax Officer u/s. 34 on the basis of notice dated 23rd  February, 1950 were "filed" ? (2)  Whether on the facts and circumstances of the case, the assessment dated 2nd May, 1956 made by the Principal  (main) Income tax Officer, Distt. 1(2) was barred by time ?" The  High Court disagreed with the view of the Tribunal  and held  that the notice dated 23rd February, 1950  was  valid, and  proceedings on it were continuing, so that the  revenue authorities  ’Could not extend the period of  limitation  by assessing  after  the  expiry of eight years  by  issuing  a second  notice  on the eve of the expiry of eight  years  to obtain a period of one additional year from the date of  the service   of  the  second  notice.   The   assessment   was, therefore,  held  to be barred by limitation on  the  ground that  .it should have been completed. by 31st  March,  1956. This appeal 689 has now been brought up to this Court by the Commissioner of Income-tax,  Calcutta,  on a certificate  granted  under  s. 66A(2) by the High Court. It  appears  in  this case that at one  stage  there  was  a contest  between the parties as to whether the notice  dated 23rd  February, 1950 was validly issued under s. 34 or  not. Even  before the High Court it seems that some  attempt  was made  on behalf of the assessee to raise the  question  that the notice dated 23rd February, 1950 under s. 34 was invalid on  the  ground that it was issued  without  completing  the assessment  on the voluntary returns submitted  on  December 22, 1947 and March 31, 1949.  On behalf of the Commissioner, the  contention  before  the  High Court  was  that  on  the question  referred  to  the Court it was  not  open  to  the assessee to raise this contention.  The objection raised  by the Commissioner was rightly accepted by the High Court.  It is  plain from the two questions referred to the High  Court that  the  High  Court was not called upon  to  express  any opinion  about  the  validity  of  the  notice  dated   23rd February, 1950.  The first question only invited the opinion of  the High Court on the limited point whether, in view  of the  fact that proceedings commenced by the A.I.T.O. on  the

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basis of notice dated 23rd February, 1950 were merely filed, the  notice  under  s. 34 issued by  the  P.I.T.O.  and  the assessment  based on it were valid in law.  The  only  other question was whether the order of assessment dated 2nd  May, 1956  made by the P.I.T.O. was barred by time.   Neither  of these  questions enlarged the scope of the reference  before the High Court so as to permit it to examine the validity of the  notice  dated  23rd  February,  1950,  and  the  Court, therefore, was right in refusing to go into this question. In this appeal, consequently, we are only concerned with the correctness of the answer returned by the High Court to  the two  questions referred to it by the Tribunal.   The  answer given by the High Court to the two questions referred to  it is  clearly based on the view taken by that Court  that  the order  of  the A.I.T.O. dated 4th February,  1952,  did  not terminate or put an end to the proceedings which were  going on  before him in pursuance of the notice under s. 34  dated 23rd February, 1950, and it is the correctness of this  view of the High Court that has to be examined. Learned  Solicitor-General,  appearing  on  behalf  of   the Commissioner,  urged  before  us that  in  interpreting  the effect  of  the  order  made by  the  A.I.T.O.  on  the  4th February, 1952, we should try to discover what was the  real intention  of the A.I.T.O. when he ordered that the case  is "filed".   The  intention has to be inferred  from  all  the surrounding  circumstances in which the order was made.   At the time when this case came up before him on 4th  February, 1952, the A.I.T.O. was expecting a return to be filed by 690 the assessee in response to the notice which had been issued by him under s. 34.  A constituted attorney appeared for the assessee and requested that the return already filed on  the 22nd  December, 1947 may be treated as the return  submitted in  response to the notice.  The A.I.T.O., noted this  fact. Further,  it appears that he was already aware that  another proceeding  on the basis of a voluntary return  was  pending before  the  P.I.T.O.,  and consequently  in  his  order  he recorded  his  opinion  that the income  (referring  to  the income  to which the voluntary return dated  22nd  December, 1947  related)  should be taken ’in the  assessment  of  the military  contract income for which there was another  file. This  remark  recorded  by  him in  his  order  gives  clear indication  that he felt at that stage that it would not  be right for him to continue the proceedings which were pending before   him,  obviously  because  another  proceeding   for assessment  of  the  same assessee was  pending  before  his senior  Officer, viz., the P.I.T.O. He,  therefore,  ordered the  case  to  be filed.  In making  this  order,  the  only intention  the A.I.T.0 could have was that  the  proceedings before  him  should no longer remain in existence  as  being unnecessary  proceedings.   The  very income  which  he  was called upon to assess to tax was to be taken into account by his  senior officer and, therefore, he felt that  he  should not  continue simultaneous proceedings for the same  purpose as  the proceedings before his senior Officer.  In  ordering that the case be filed, therefore, he clearly intended  that the proceedings before him should be terminated or  dropped. There  is no indication in the order that what the  A.I.T.O. intended was that the proceedings before him should continue to  remain  pending  and  should be dealt  with  by  him  at subsequent stage.  In fact, if the A.I.T.O. had thought that those proceedings before him had to continue and he did  not want any conflict with his senior officer, the order that he would  have  made in the circumstances before him  was  that these proceedings be also submitted to the P.I.T.O. He seems

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to  have  considered it unnecessary to do  so,  because  his opinion  was  that, in the assessment proceedings  going  on before  the  P.I.T.O., the income to which  the  proceedings before him related would also be included, so that there was no  need for any proceedings remaining in  existence  before him.    The  intention,  thus,  clearly  was  to  drop   the proceedings  and  not  to continue  them  any  further.   Of course,  he could have expressed his intention more  clearly by saying that he was cancelling the proceedings before him, or was terminating them.  We think that the learned  counsel for  the  Commissioner has rightly contended  that,  in  the circumstances  of  this  case, the word  "filed"  should  be interpreted  as being equivalent to "disposed of",  so  that after  that  order, no proceedings on the  basis  of  notice dated  23rd  February,  1950  remained  pending  before  the A.I.T.O. In effect, therefore, what he did was to  terminate the  proceedings  before  him without making  any  order  of assessment, on the ground that the order of assessment 691 in  respect of the income in question would be made  by  the P.I.T.O. in the proceedings before him. An order in language not contemplated by the Income-tax  Act in proceedings on a notice under s. 34(1) came for interpre- tation before this Court in Esthuri Aswathiah v.  Income-tax Officer,  Mysore  State.(’) In that case, the  assessee  had submitted a return showing that he had no assessable income. Thereupon,   the  Income-tax  Officer  made  an  order   "no proceedings." Subsequently, when a notice under s. 34(1) for reassessment  was  issued, an objection was taken  that  the notice  was incompetent, because proceedings on  the  return filed  were  still  pending.   This  Court  held  that   the submission  that the previous return "had not been  disposed of"  and  until the assessment pursuant to that  return  was made,  no  notice under s. 34(1) for reassessment  could  be issued,  had  no substance.  It was further  held  that  the Income-tax Officer had passed the order "no proceeding"  and such an order, in the circumstances of the case, meant  that the Income-tax Officer accepted the return and assessed  the income  as  ’nil’.   In  that  case,  thus,  the  order  "no proceeding"   was   interpreted   in  the   light   of   the circumstances  in which that order was passed.  In the  case before us, the order directing that the case be-filed has to be  similarly interpreted in the circumstances in  which  it was passed; and as we have indicated above, the only  proper interpretation is that the A.I.T.O. intended to conclude the proceedings  before  himself  in  view  of  the  fact   that proceedings were going on before his senior officer. Our  attention was also drawn to a decision of the  Calcutta High  Court  in Income-tax Reference No.  128  of  1961-Haji Mohamed Mian v. The Commissioner of Income-tax, Calcutta  in which  judgment was delivered on February 23 1965.  In  that case  also, proceedings had begun on the basis of  a  notice under  s.  22(2)  of the Income-tax Act, and,  at  a  latter stage,  the Income-tax Officer ordered that the  proceedings be filed on the ground that no return had been filed by  the assessee  in  response  to the notice.   The  order  of  the Income-tax Officer was interpreted as amounting to  dropping of  the  proceedings,  and  it was  further  held  that  the dropping  of the proceedings meant the  termination  thereof without  any  order  of  assessment.   In  that  case  also, therefore,  the subsequent issue of notice under s.  34  was held  to  be  valid  and not vitiated  on  the  ground  that proceedings for assessment in pursuance of the notice  under s. 22(2) were still going on. Mr.  A. K. Sen, on behalf of the assessee, urged  before  us

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that once proceedings had been started under s. 34 by  issue of  the not’ Ice dated 23rd February, 1950, the  proceedings brought into existence (1)  [1961] 2 S.C.R. 911 692 could  not be dropped, because the scheme of the  Income-tax Act is that such proceedings must end in some final order of assessment, even though that order may be to the effect that there  is  no  taxable income and no tax  is  determined  as payable.   He relied on a decision of the Bombay High  Court in  P. T. Anklesaria and others v. Commissioner  of  Income- tax,  Bombay  South(’)  in  which  the  Income-tax   Officer received a voluntary return, though without any notice under s.  22(2), issued a notice under s. 23(2), and again,  after obtaining  the  permission of the Commissioner  to  issue  a notice  under s. 34, he issued a notice under s. 23(2),  and failed  to  issue any notice under s. 34.   Thereafter,  the Income-tax Officer made the following order - "Return  has been filed under S. 34 claiming a loss  of  Rs. 74,140/-  only.   Since I find that no  income  has  escaped assessment, proceedings under section 34 are dropped." In  these circumstances, the High Court held that  as  there was  a valid return voluntarily filed by the  assessee,  the order of the Income-tax Officer was invalid and bad in  law. There was no provision by which the Income-tax Officer could refuse  to assess the loss shown in the  return,  especially when  he had actually issued a notice under s.  23(2)  after the  return had been made.  It was urged before us that,  on the principle laid down in that case, the order made by  the A.I.T.O. directing that the case be filed must be held to be an  invalid  order as it was essential that he  should  have passed  an order assessing the income and  then  determining the  tax  payable  under s. 23, even if the  result  of  the determination was that the tax payable was nil.  Even if  it be  accepted  that  the order made by the  A.I.T.O.  in  the present  case  was invalid, its effect cannot  be  that  the proceedings  before  the  A.I.T.O.  must  be  held  to  have continued after that order was made by him.  Even an invalid order terminating proceedings has the effect of  terminating them;  and  in  such  a case,  the  appropriate  method  for correcting  the illegality committed is to have  that  order vacated  by  appellate or other  higher  authorities  having jurisdiction to intervene.  As long as the order is not  set aside, it remains in force and takes full effect.  The order was  not  totally without jurisdiction; at best, it  was  an order not contemplated by law and it could not be treated as a  non-existent order.  In the present case also, the  order of the A.I.T.O. directing that the case be filed could  have been  set  right on appeal, or by a reference  to  the  High Court,  in case the Triburial refused to correct it.   While it  was not set aside, the only conclusion possible is  that the  proceedings before the A.I.T.O. terminated and did  not any longer continue to remain pending. The High Court, in dealing with this question, proceeded  on the  further basis that when the order of transfer was  made by the (1)  35 I.T.R. 532. 693 Commissioner of Income-tax on 30th December, 1956, this pro- ceeding   must  have  been  treated  as  pending,   because, otherwise,.  the order of transfer would not relate  to  any pending case at all.  The High Court held: "Therefore,  when the transfer of the case was made under s. 5 (7A), it cannot be said that the notice issued by the Additional Officer had been  wiped out, or did not remain alive.  If there  was  no

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case,  there could not be any transfer of the case." We  are unable to accept the view of the High Court that an order of transfer  could  not have been made  unless  some.  specific proceeding  for  assessment  of  the  assessee  to  tax  was actually  pending.   The explanation to s.  5(7A)  makes  it clear that the word " case", in relation to any person whose name  is  specified  in the order  of  transfer,  means  all proceedings  under the Act in respect of any year which  may be  pending on the date of the transfer,. and also  includes all  proceedings under the Act which may be commenced  after the  date of the transfer in respect of any year.  The  word "case  " is thus used in a comprehensive sense of  including both  pending  proceedings  as well  as  proceedings  to  be instituted  in future.  Consequently, an order  of  transfer can be validly made even if there be no proceedings  pending for  assessment of tax and the purpose of the  transfer  may simply  be  that all future proceedings are  to  take  place before  the  officer  to whom the case of  the  assessee  is transferred.   In the present case, the proceedings  on  the notice  dated 23rd February, 1950, had already  been  termi- nated  by the A.I.T.O. by his order directing that the  case be filed.  Consequently, the effect of the order of transfer was  that all the records relating to the assessment of  the assessee  had to be sent to the P.I.T.O., and this was  with the  object  that, in future, all .proceedings  relating  to assessment of this assessee were to be taken by the P.I.T.O. and  not  the  A.I.T.O.  The  order  does  not  necessarily, indicate  that  those  proceedings which  the  A.I.T.O.  had actually terminated were still to be treated as pending  and to stand transferred as pending proceedings. Since  the  case  of the assessee  was  transferred  to  the P.I.T.O. at the stage when no proceeding Was pending  before the A.I.T.O., the P.I.T.O. became seized of the jurisdiction to  take any proceedings against the assessee which the  law permitted.  It was clearly in exercise of this  jurisdiction that  the P.I.T.O. issued the Subsequent notice  dated  11th February,  1956.   That notice was,  therefore,  competently issued  by  him and was also valid, because  it  was  issued before  the  expiry  of  eight years from  the  end  of  the relevant  assessment year 1947-48.  The notice  having  been issued validly within the period of limitation permitted  by s.  34(3),  the  actual order of assessment  could  be  made validly before the expiry of the period of one year from the date of the notice.  The order of assessment dated 2nd  May, 1956,  was consequently a valid order and was not barred  by time.