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PETITIONER: K.   C. THOMAS, FIRST INCOME-TAX OFFICER, BOMBAY

       Vs.

RESPONDENT: VASANT HIRALAL SHAH & ORS.

DATE OF JUDGMENT: 29/01/1964

BENCH: MUDHOLKAR, J.R. BENCH: MUDHOLKAR, J.R. SINHA, BHUVNESHWAR P.(CJ) SUBBARAO, K. DAYAL, RAGHUBAR AYYANGAR, N. RAJAGOPALA

CITATION:  1964 AIR 1034            1964 SCR  (6) 437  CITATOR INFO :  R          1965 SC 342  (20)

ACT: Income Tax-Escaped income-Notice issued for assessment after expiry  of  8 years-If sanction  required-Indian  Income-tax Act, 1922 (11 of 1922). ss. 34(i), 34(ii), 34(3) proviso. as amended by Act XXV of 1953 and Act XVII of 1956.

HEADNOTE: The appellant had issued notice to the respondents under  s. 34(1)( of the Income Tax Act, 1922 in respect of an  escaped income  of Rs. 47,595 for the assessment year 1944-45.   The case of the respondents was that the impugned notice was bad because   the  Income-Tax  Officer  proceeded  against   the respondents without obtaining the necessary sanction of  the Central  Board  of Revenue as required by cl. (iii)  of  the proviso  to  s. 34(1) of the Act.  The respondents  filed  a writ  petition  in  the High Court  challenging  the  notice issued under s. 34(1) of the Art.  The respondents succeeded before the High Court. 438 Held:     (i) The sanction under cl. (iii) of the proviso to s.  34(1)  is, however, necessary only where the  notice  in question  is issued under cl. (ii) of the proviso.  That  is evidently  what the legislature meant when it said  "in  any case failing under cl. (ii)".  The words "in any case"  used in cl. (iii) only mean a case in which notice can be  issued under  cl. (ii).  Such a notice can be issued only when  the escaped  income is of one lakh of rupees and  over.   Clause (iii)  requires  such sanction where the  notice  is  issued under  cl. (ii) and when on a construction of cl.  (ii),  no notice  can  be issued with respect to a  class  of  escaped assessments,  there  can possibly be no requirement  of  the sanction  of the Central Board of Revenue.  If a  notice  is issued  by virtue of some other provision sub as the  second proviso to sub-s. (3) of s. 34, it would be a notice "in any other case" referred to in cl. (iii) of the proviso to  sub- s.  (1)  of s. 34 and in such a case the sanction  which  is required is only that of the Commissioner.  Such a  sanction

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was  obtained in this case and therefore, the notice  cannot be said to be bad because the sanction of the Central  Board of Revenue had not been obtained. In the present case the income which has escaped  assessment is  below one lakh of rupees and more than eight years  have elapsed  since the assessment year in respect of  which  the income  is  alleged to have  escaped  assessment.   Clearly, therefore, no notice could issue under cl. (ii). (ii) The High Court erred in holding that the provisions  of the second proviso  to  s. 34(3) would not apply to  a  case where the escaped assessment is    of an amount less than  a lakh  of  rupees  and more than eight  years  have  elapsed. Apparently, the High Court has overlooked the fact that  the second  proviso to sub-s. (3) of s. 34 was amended first  by Act  25 of 1953 and then by Act. 18 of 1956.  The  amendment of  1956  would  govern  the whole of  s.  34(1)  and  would consequently include even an escaped assessment with respect to  which  limitation is provided in cl. (ii) of  the  first proviso  to s. 34(1).  The result would be the same even  if the  case fell to be governed by the Amending Act  of  1953, though not by that of the Amending Act of 1956.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 688 of 1962. Appeal  by special leave from the judgment and  order  dated April 1, 1958 of the Bombay High Court in Misc.  Application No. 202 of 1957. N.   D. Karkhanis and R. N. Sachthey, for the appellant. I.   N. Shroff for the respondents. January  29, 1964.  The Judgment of the Court was  delivered by MUDHOLKAR J.-This is an appeal by special leave against  the judgment  of  the  Bombay  High Court  in  a  writ  petition challenging  the notice issued under s. 34(1) of the  Indian Income-tax Act, 1922 by the First Income-tax Officer, 439 Bombay,  who  is  the  appellant before  us.   In  the  writ petition  various  grounds were urged by the  respondent  in support  of the convention that the notice was bad  in  law. The  High  Court,  however, dealt with  only  one  of  those contentions,  accepted  it, and did not permit  the  respon- dents’  counsel Mr. Mehta to put forward the  other  conten- tions urged in the writ petition by the respondents. The appellant had issued notice to the respondents under  s. 34(1)(a)  of  the Income-tax Act in respect  of  an  escaped income of Rs. 47,595 for the assessment year 1944-45.   This notice  was issued by him on March 27, 1957.  On  behalf  of the  respondents,  it is contended that the notice  was  bad because, though it was in respect of an amount of less  than Rs.  1 lakh it was issued after the expiry of the assessment year  and that the sanction of the Central Board of  Revenue for issuing that notice had not been obtained by the Income- tax  Officer as required by cl. (iii) of the proviso  to  s. 34(1)  of  the Act.  It is not disputed before us  that  the case falls under s. 34(1)(a).  That provision reads thus:               "(1) If--               (a)   the  Income-tax  Officer has  reason  to               believe  that  by reason of  the  omission  of               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

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             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, or excessive loss  or  depre-               ciation allowance has been computed, or....               he  may in cases falling under clause  (a)  at               any  time . . . . . . serve on the assessee  a               notice  containing all or any of the  require-               ments which may be included in a notice  under               sub-section (2) of section 22 and may proceed               440               to assess or re-assess such income, profits or               gains  or recompute the loss  or  depreciation               allowance;  and  the provisions  of  this  Act               shall, so far as may be, apply accordingly  as               if the notice were a notice issued under  that               subsection:" We have quoted only the relevant portion.  Then follows  the first proviso which runs thus:               "     provided  that  the  Income-tax  Officer               shall not issue, a notice under clause (a)  of               sub-section (1) (i) for any year prior to  the               year ending on the 31st day of March 1941;               (ii)  for  any  year,  if  eight  years   have               elapsed after the expiry of that year,  unless               the  income,  profits or gains  chargeable  to               income-tax  which have escaped  assessment  or               have been underassessed or assessed at too low               a  rate  or  have been  made  the  subject  of               excessive  relief under this Act, or the  loss               or  depreciation  allowance  which  has   been               computed  in excess, amount to, or are  likely               to  amount to, one lakh of rupees or  more  in               the  aggregate, either for that year,  or  for               that  year and any other year or  years  after               which or after each of which eight years  have               elapsed, not being a year or years ending  be-               fore the 31st day of March 1941;               (iii) for any year, unless he has recorded his               reasons for doing so, and, in any case falling               under clause (ii), unless the Central Board of               Revenue,   and,   in  any  other   case,   the               Commissioner,  is  satisfied on  such  reasons               recorded  that it is a fit case for the  issue               of such notice:" It  will thus be seen that where the Income-tax Officer  has reason to believe that due to any act of the assessee a full and  accurate declaration was not made by the  assessee  for any year, with the result that part of his income has escap- ed  assessment  for that year, the  Income-tax  Officer  may issue a notice under cl.(a) at any time. 441 The  respondents’ contention before the High Court was  that the notice was bad because it had not complied with the  two conditions laid down in the proviso to s. 34(1).   Adverting to this contention the High Court has observed thus:               "Before  the amendment of this  section  which               was  in  force  on the 27th  March,  1957  the               period  of  limitation  of  eight  years   was               provided  with regard to the issue of  notices               under  Section 34(1) (a) and a period of  four               years for cases falling under Section 34(1)(b)               By the amendment the period of limitation  was               removed  and the Legislature provided that  if

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             the case fell under Section 34(1) (a) a notice               can be served at any time.  But while removing               any   bar  of  limitation,   the   Legislature               provided some safeguards for the assessee  and               these safeguards were three in number and they               were  set  out  in  the  proviso.   The  first               safeguard  was  that  a notice  shall  not  be               issued  for any year prior to the year  ending               on  the  31st day of March  1941;  the  second               safeguard was that if eight years had  elapsed               then  the notice should not be issued  for  an               escaped  income which aggregated to less  than               one  lakh of rupees; and the  third  safeguard               was  that the Central Board of Revenue had  to               be  satisfied on reasons to be  recorded  that               this was a fit case for the issue of a notice,               which  was  for a period beyond  eight  years.               Now, admittedly, this notice is for an  amount               which  is  less  than a  lakh  of  rupees  and               admittedly  the Central Board of  Revenue  has               not considered this matter at all.  Therefore,               there  does not seem to be any answer  to  the               contention put forward by the petitioner." The  High Court is right in saying that a notice  cannot  be issued where the income which has escaped assessment is less than  a lakh of rupees and where more than eight years  have elapsed from the assessment year.  To this, however, 442 there  is one exception and that is where the  matter  would fall  to be governed by the second proviso to s. 34(3).   To this aspect we will, however, come little later.  But before that  what  we must consider is the view of the  High  Court that  the sanction of the Central Board of Revenue was  also necessary.   Under  cl. (iii) of the proviso to s.  34(1)  a notice  can  issue only if the Central Board of  Revenue  is satisfied  with  the  reasons  recorded  by  the  Income-tax Officer  for  issuing  a notice.   For  convenience  we  are describing this process as sanction of the Central Board  of Revenue.   The  sanction  under  this  clause  is,  however, necessary only where the notice in question is issued  under cl.  (ii)  of  the  proviso.  That  is  evidently  what  the Legislature  meant when it says "in any case  falling  under clause (ii)".  For, cl. (ii) has to be read with the opening words of the proviso: "Provided that the Income-tax  Officer shall  not  issue a notice under clause (a)  of  sub-section (1)".  So read it will be clear that the words "in any case" used  in cl. (iii) only mean a case in which notice  can  be issued  under  cl. (ii).  Such a notice can be  issued  only when  the escaped income is of one lakh of rupees and  over. It  was, however, contended by Mr. Shroff that cl.  (ii)  of the  proviso dealt not only with the escaped  assessment  of one lakh of rupees and over but also with assessments  which were less than one lakh of rupees and that, therefore,  even in  the  present case the sanction of the Central  Board  of Revenue  was required.  By excluding action with respect  to escaped assessment of less than one lakh of rupees, cl. (ii) can,  in,  one sense, be regarded as  dealing  with  escaped assessments of this kind.  But it would be wrong to say that because  of  this, cl. (iii) requires the obtaining  of  the sanction of the Central Board of Revenue for a notice to  be issued  with  respect to it.  As already  pointed  out,  cl. (iii)  requires  such sanction where the  notice  is  issued under  cl. (ii) and when on a construction of cl.  (ii),  no notice  can  be issued with respect to a  class  of  escaped assessments,  there  can possibly be no requirement  of  the

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sanction  of the Central Board of Revenue.  If a  notice  is issued by virtue of some other provision such as the  second proviso to sub-s. (3) of s. 34, it would be a notice "in any other case" referred to in cl. (iii) of the proviso to  sub- s. (1) of s. 34 and in such a case the sanction which is 443 required is only that of the Commissioner.  Such a  sanction was obtained in this case and, therefore, the notice  cannot be said to be bad because the sanction of the Central  Board of Revenue has not been obtained.  Now, we will come to  the other aspect of the matter. Limitation is no doubt placed upon the power of the  Income- tax Officer by cl. (ii) of the first proviso which says that if eight years have elapsed after the expiry of that year no such  notice can issue unless the income which  has  escaped assessment  is  likely to amount to one lakh  of  rupees  or more.    Here  admittedly  the  income  which  has   escaped assessment  is below one lakh of rupees and more than  eight years  have elapsed since the assessment year in respect  of which  the  income is alleged to  have  escaped  assessment. Clearly,  therefore  no notice could issue under  cl.  (ii). The answer given by the Income-tax Officer, however, is that limitation is taken away by the second proviso to sub-s. (3) of s. 34.  We would quote s. 34(3) and the second proviso to it.  They run thus:               "No order of assessment or reassessment, other               than  an order of assessment under section  23               to  which  clause (c) of  sub-section  (1)  of               section  28 applies or an order of  assessment               or reassessment in cases falling within clause               (a) of sub-section (1) or sub-section (]A)  of               this section shall be made after the expiry of               four  years from the end of the year in  which               the   income  profits  or  gains  were   first               assessable:               Provided  further  that nothing  contained  in               this  seetion 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 re-assessment 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." 444 The  second proviso to s. 34(3) could be pressed in  aid  by the Income-tax Officer because in issuing the notice he  was giving  effect  to a direction contained in the order  of  a nigher Income-tax authority. Dealing  with  this matter the High Court  has  observed  as follows in its judgment:               "Now,  when  there was a limitation  of  eight               years   under  section  34(1)(a)  the   second               proviso  to Section 34(3) has to be  resorted.               Section  34(3)  had to be resorted to  by  the               Income-tax Department if it wanted to issue  a               notice  after the period of limitation, and  a               notice  after  eight years in a  case  falling               under  section 34(1) (a) could only be  issued               provided  it  was  a  result  of  a  direction               contained in an order passed by an  Income-tax               Authority.   But  by  reason  of  the   recent               amendment the question of limitation does  not

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             arise,   but  the  Legislature  has   provided               certain  safeguards  as already  pointed  out.               Therefore,  whether  a notice is issued  as  a               result  of a direction contained in any  order               of an Income-tax Authority or not, if it is  a               notice which is issued beyond eight years  the               notice  must satisfy the conditions laid  down               in  the proviso to Section 34(1).   Therefore,               the  result is that in some respects  the  law               has  been  made  more  rigorous  against   the               assessee;  and in other respects it  has  been               made  more  lenient.  Before the  amendment  a               notice  could be issued after eight  years  in               respect  of any escaped income,  whatever  the               amount, provided the notice was issued to give               effect to a direction contained in an order of               an  Income-tax Authority.  Now a direction  is               not necessary for the issue of a notice.   But               as  against  that an  assessee  whose  escaped               income  is not a lakh of rupees is  completely               protected  and  even  though there  may  be  a               direction contained in an order of an  Income-               tax Authority no notice can be issued               445               against the assessee if the escaped income  is               less than a lakh of rupees.  Therefore, on the               one hand, the assessee whose escaped income is               less  than  a lakh of rupees is now put  in  a               better position than he was before the  amend-               ment.   The assessee whose escaped  income  is               more  than a lakh of rupees is put in a  worse               position  because he can be proceeded  against               even without a direction contained in an order               of  an Income-tax Authority provided the  Cen-               tral Board of Revenue has applied its mind  to It would appear that the view of the High Court was that the provisions of the second proviso to s. 34(3) would not apply to a case where the escaped assessment is of an amount  less than  a  lakh  of  rupees and more  than  eight  years  have elapsed.  Apparently, the High Court has overlooked the fact that  the second proviso to sub-s. (3) of s. 34 was  amended first  by Act 25 of 1953 and then by Act 18 of 1956.  As  it stood prior to these amendments it read thus:               "Provided  further that nothing  contained  in               this subsection shall apply to a re-assessment               made  under section 27 or in pursuance  of  an               order  under section 31, section  33.  section               33A, section 33B, section 66 or section 66A." By  the amendment of 1953, for the words "sub-section",  the words "section limiting the time within which any action may be  taken or any order, assessment or re-assessment  may  be made"  were  substituted.  By the amendment of 1956  it  now stands  as  already  quoted by us.  If the  proviso  in  its present  form applies here it would govern the whole  of  s. 34(1)  and  would  consequently  include  even  an   escaped assessment  with respect to which limitation is provided  in cl.  (ii) of the first proviso to s. 34(1).  The result,  in our opinion. would be the same even if the case were to fall to  be governed by the Amending Act of 1953, though  not  by that of the Amending Act of 1956, 446 We may add that the amendment of 1953 took effect from April 1, 1953 and that of 1956 from April 1, 1956. Apart  from  the  view expressed by the  learned  Judges  as regards the effect of the changes made in s. 34(1) with  the

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provisos  we have set out earlier a view which we have  held is  not  correct-they aid not further  consider  the  proper construction to be placed on the second proviso to s.  34(3) of  the Act on which the validity of the impugned notice  to the respondents must ultimately be decided. As  we  have pointed out earlier, at the  beginning  of  the judgment, the learned Judges confined their attention  prac- tically  only  to the construction of proviso  (iii)  to  s. 34(1)  which was decided in favolur of the  respondents  and did  not  permit them to argue the other  points  raised  by them.   We  do  not propose to decide  these  other  points, particularly for the reason that the parties are not  agreed as to what precisely were the contentions which were  raised for argument. For the reasons stated above, the decision of the High Court is  clearly  wrong.  We, therefore, allow  the  appeal,  set aside the order of the High Court and remit the matter to it for the consideration of the other points which were  raised before  it by the respondents but upon which they  were  not heard.  As regards costs we think that they should abide the result of the appeal before the High Court. Appeal allowed and cave remanded.