http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8  

PETITIONER: TRUSTEES OF H.E.H.  THE NIZAM’S SUPPLEMENTAL FAMILY TRUST

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX

DATE OF JUDGMENT:       16/02/2000

BENCH: D.P.Wadhwa, S.S.M.Quadri

JUDGMENT:

     D.P.  WADHWA, J.

     The   question  that  calls   for  consideration   is: Whether,  on the facts and in the circumstances of the case, the  assessment  made  by  the Income-tax  Officer  for  the Assessment  Year  1962-63  under Section  143(3)  read  with Section 147 of the Income Tax Act, 1961 is valid in law?

     The  case  concerns  the H.E.H.   the  Nizam’s  second Supplemental  Family Trust.  The trustees of the trust filed income  tax return for the Assessment Year 1962-63 on behalf of  the  beneficiaries  on April 2, 1964.   Along  with  the return  they  filed an application under Section 237 of  the Income Tax Act, 1961 (for short the ’Act’) for refund of tax of Rs.20,050.52 deducted at source on interest on Government securities  and dividends.  Section 237 of the Act  provides for refund and it is as under:  -

     "237.   If any person satisfies the Assessing  Officer that  the  amount  of tax paid by him or on  his  behalf  or treated  as paid by him or on his behalf for any  assessment year exceeds the amount with which he is properly chargeable under  this  Act  for that year, he shall be entitled  to  a refund of the excess."

     Under Rule 41 of the Income Tax Rules, 1962 (for short the  ’Rules’)  a claim for refund is to be made in Form  No. 30.  This Rule is as under:  -

     "41.(1)  A claim for refund under Chapter XIX shall be made in Form No.30.

     (2)  The claim under sub-rule (1) shall be accompanied by  a return in the form prescribed under section 139 unless the claimant has already made such a return to the Assessing Officer.

     (3)  Where  any part of the total income of  a  person making  a  claim for refund of tax consists of dividends  or any  other income from which tax has been deducted under the provisions  of sections 192 to 194, section 194A and section 195,  the  claim  shall be accompanied by  the  certificates prescribed under section 203.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8  

     (4)  The claim under sub-rule (1) may be presented  by the claimant in person or through a duly authorised agent or may be sent by post."

     The claim for refund is to be accompanied by return of income  in the form prescribed under Section 139 of the  Act unless  the  claimant has already made such a return to  the Income-tax Officer.

     Since  there  was  no  response  from  the  Income-tax Officer  the  trustees  reminded him on June  17,  1964  for disposal  of the refund application.  The Income-tax Officer gave  a reply on July 22, 1964 stating that the refund could not  be granted to the trustees unless the references on the same  question  for the preceding assessment years filed  by the trustees were disposed of by the High Court.  A reminder was  again sent by the trustees on September 23, 1966 to the Income-tax  Officer  for grant of refund but again no  reply was  given  by the Income-tax Officer.  Thereafter a  notice under  Section  148 of the Act was received by the  trustees from  the  Income-tax Officer requiring them to file  return for  the Assessment Year 1962-63.  Return was filed on  July 3,  1970 declaring an income of Rs.6, 26,200/- as long  term capital  gain.   It  would appear that on the same  day  the return  was accepted on the income returned by the trustees. The  trustees  thereafter raised an objection by writing  to the  Income-tax  Officer  on July 3, 1970,  after  they  had received the assessment order, that the return filed by them on  April  2, 1964 along with refund application  was  still pending  and,  therefore,  the proceedings  initiated  under Section 147 of the Act were invalid.  They also claimed that the assessment made pursuant to the notice under Section 148 was  equally  invalid.  To this the Income-tax Officer  sent his  reply on July 16, 1970 stating that the return filed on April 2, 1964 was disposed of on November 10, 1965 by a note recorded  by the Income-tax Officer in his file.  This  note was  recorded on November 10, 1965 in the file pertaining to Assessment Year 1963-64 and was to the following effect:  -

     "In  view of the Supreme Court judgment in the case of H.E.H.   Nizam,  the  question  of  giving  credit  for  tax deducted  at  source can be considered in the hands  of  the beneficiaries.   Hence,  no credit for the tax  deducted  at source is to be allowed here.  The question of refunding the additional surcharge will have to be considered."

     Against  the order of reassessment dated July 3,  1970 trustees  filed  an  appeal before the  Appellate  Assistant Commissioner  questioning the same.  The Appellate Assistant Commissioner  took the view that the Income-tax Officer  had not  passed the final orders on the return filed on April 2, 1964  along with application seeking refund.  He, therefore, held  that  the reassessment made by the Income-tax  Officer pursuant  to  the  notice under Section 148 of the  Act  was invalid  and cancelled the same.  The Revenue then took  the matter  in  appeal  to the Income  Tax  Appellate  Tribunal. Following two questions were raised before the Tribunal:  -

     "(1) Whether the return filed by the assessee on April 2,  1964,  along with the refund application was  one  filed under section 139(1) of the Income-tax Act?

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8  

     (2) Even if it is assumed that the return filed by the assessee  along  with  the   refund  application   commences assessment  proceedings,  whether the proceedings should  be treated  to have been finalised by the Income-tax Officer at least by his note dated November 10, 1965, if not earlier by his  letter  dated  September  26, 1964,  addressed  to  the assessee,  and  as  the  proceedings  for  the  refund  were terminated  by  the  Income-tax Officer by  his  note  dated November  10,  1965,  there is no bar for  the  reassessment proceedings  for the same year and, hence, the  reassessment proceedings  in respect of the income of such year would  be valid?"

     There was difference of opinion between the Accountant Member  and the Judicial Member comprising the Tribunal  and the matter was referred to the third member in the following manner:  -

     "Whether, on the facts and in the circumstances of the case,  the  order  of  assessment made by  the  Income-  tax Officer for the Assessment Year 1962-63 under Section 147 of the Income-tax Act, 1961, is valid in law."

     The  Accountant Member was of the view that the return filed  by  the assessee along with its refund claim did  not set in motion any assessment proceedings and consequentially there   were  no  assessment   proceedings  which   remained undisposed  of by the Income-tax Officer at the time when he initiated   proceedings  under  Section   147  of  the  Act. Judicial Member was of the view that on consideration of the entirety  of  the  facts and circumstances of the  case  the return  filed  by the assessee on April 2, 1964 was a  valid return.   On  second question whether proceedings  had  been terminated  by  the noting of the Income-tax Officer in  the order  sheet the Accountant Member held that proceedings, if any,  that commenced with the return, were terminated by the Income-tax  Officer by his note dated November 10, 1965.  On the second question the Judicial Member held that on a plain reading of the endorsement made by the Income-tax Officer it was  very  clear  that no disposal was given to  the  return filed  and  the  said  endorsement related  to  the  opinion expressed  by the Income-tax Officer about giving credit for tax deduction at source.  Third member (Mr.  D.  Rangaswamy, Vice  President)  after examining the whole matter  said  as under:  -

     "Since  I have already expressed my agreement with the views  expressed  by  the Judicial Member  that  the  return accompanying  an  application for refund is a  return  under section   139  and  all   the  procedures,  formalities  and machineries  applicable  to  proceedings of a  return  under section  139 would apply and I have further agreed with  his view  that there has been no termination of the proceedings, I  hold  that  both the Judicial Member  and  the  Appellate Assistant  Commissioner  were  right  in  holding  that  the assessment  made  by  the Income-tax  Officer,  pursuant  to notice  under  section  147  was   invalid  and  has  to  be accordingly cancelled."

     Thereafter,  in  conformity  with  the  views  of  the majority of the members the Tribunal dismissed the appeal of the revenue.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8  

     At the instance of the revenue under Section 256(1) of the  Act  the Tribunal referred the question of law  arising from  its order to the Andhra Pradesh High Court as set  out in  the  beginning of this judgment for the opinion  of  the High Court.  High Court was of the view that the order dated November  10,  1965  of  the   Income-tax  Officer  on   the note-sheet  (reproduced  above) was an order of disposal  of the  tax  return  filed by the trustees.  It held  that  the return  filed  by the trustees on April 2, 1964  along  with refund  application  was one filed under Section 139 of  the Act  and was valid return and as the refund application  was disposed  of  by  order  dated  November  10,  1965  of  the Income-tax  Officer,  there was no bar to  the  reassessment proceeding   for   the  same   year  and  the   reassessment proceedings were, therefore, valid.

     Now  it is the assessee, which felt aggrieved and  has come  to  this  Court.  It is not disputed that  the  return filed  with the refund application under Section 237 of  the Act  is  a  valid  return and  the  Income-tax  Officer  can initiate  proceedings  for  assessment on the basis  of  the return  so  filed.   The  only   question  that  falls   for consideration  for  us is:  if in the circumstances  of  the case  it  could  be  said  that the  note  recorded  by  the Income-tax  Officer  in his file on November 10, 1965 is  an order  which  concluded the assessment proceedings  for  the Assessment  Year  1962-63  before he  initiated  proceedings under  Section 147 of the Act.  It is also not disputed that this  note/order  of  November   10,  1965  terminating  the assessment  proceedings for the Assessment Year 1962-63  was never  communicated  to the trustees till July 16, 1970  and that  too  in  a reply to the letter sent by  the  trustees. According to the High Court the note, which is an order, did terminate the assessment proceedings.  High Court was of the view  that the first part of the order gave reasons and  the second  part  of the order clearly spoke of  the  conclusion when  read:  "Hence no credit for tax deducted at source  is to be allowed here".

     ‘  It is settled law that unless the return of  income already  filed is disposed of notice for reassessments under Section   148  cannot  be   issued,  i.e.,  no  reassessment proceedings   can  be  initiated  so  long   as   assessment proceedings pending on the basis of the return already filed are  not  terminated.   According  to   the  Revenue  it  is immaterial whether the order is communicated or not and that the  only  bar  to  the  reassessment  proceedings  is  that proceedings  on  the return already filed should  have  been terminated.   In  support of this contention  reference  was made  to  certain  decisions  of the High  Courts  and  some observations  made by this Court in a case, which we note as under:-

     In  M.Ct.  Muthuraman vs.  Commissioner of Income-Tax, Madras  [(1963) 50 ITR 656] the assessment proceedings which had  commenced  with the returns filed by the assessee  were lawfully  terminated  when they were closed with  the  entry "N.A."   (not  assessed).   The   orders   terminating   the assessment   proceedings  were  not   communicated  to   the assessee.   The  Income  Tax Officer  issued  notices  under Section  34  of the Income Tax Act, 1922  (corresponding  to Section  147  of the Income Tax Act, 1961).  The Court  held that the assessment proceedings were lawfully terminated and that "the orders terminating the assessment proceedings were

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8  

not  apparently communicated to the assessee did not  affect the legality of those orders or their finality".

     In  V.S.   Sivalingam  Chettiar vs.   Commissioner  of Income  Tax,  Madras  [(1966) 62 ITR 678]  again  a  similar question  arose  before  the  Madras  High  Court.   It  was contended  that  the conclusion of the Madras High Court  in M.Ct.   Muthuraman’s  case that "the orders terminating  the assessment  proceedings were not apparently communicated  to the  assessee did not affect the legality of those orders or their finality" was without reasons.  But the Court rejected this contention and held :  "But we are satisfied, if we may say  so with respect, that that is the correct view to take. Wherever  orders  are made under the Act, which  affect  the assessee  in some form or other, it has provided for service of notice and the remedy there against.  Section 29 requires notice  of  demand  to be served on an  assessee;   but  the section makes it a condition that a notice of demand will be required to be served only when any tax, penalty or interest is  due  in  consequence  of any order passed  under  or  in pursuance  of  the  Act.  Learned counsel  for  the  revenue argues  that  it  is visualised by the  section  that  there should  be  an  order made under the Act  under  which  tax, penalty  or  interest  is due before a notice of  demand  is served,  and that this means that service of notice does not bear  on the validity of an order.  In other words, what  he points  out is that there should be first a valid order, and then  only  a notice of demand is required to be served,  so that service of notice is not a condition to the validity of the  order  itself.   Though prima facie  the  argument  may appear  to be tenable, the question may arise as to  whether proceedings  under section 34 could be initiated between the date of an order under the Act and service of notice of that order.   But an examination of some of the other  provisions of  the Act like sections 24(3), 23(5) and (6), 27,  proviso (2)  to section 30(1) and the related provisions in  section 30  lead  us to the conclusion that where orders are  passed under  or in pursuance of the Act, which are prejudicial  to an  assessee,  notice of the order is required to be  served and, for the purposes of resorting to the remedy, limitation is  to  count  from the date of service of  notice  of  such order.  In this case, from a purely fiscal point of view, it can  hardly  be said that the orders made by the  Income-tax Officer on the returns by the assessee as an individual were in any way prejudicial to him.  The orders did not fasten on the assessee any liability to tax.  Nor did they contain any finding  which could by any means be said to be against  the assessee  as  an  individual.   All that  was  held  by  the Income-tax  Officer was that the income, which the  assessee claimed  to be his as an individual, did not belong to  him. That  means that he was not held liable to pay any tax.   In that  sense, as it seems to us, not prejudiced as he was  by the order passed by the Income-tax Officer, failure to serve notice  thereof  did  not  deprive  these  orders  of  their validity.   In our view, on a strict reading of the Act,  it does  not  appear to contemplate service of notice  in  such cases.  Nevertheless, we feel that it is desirable from many points  of view that the revenue serves notice on  assessees of  such  orders.  It will not only tend to fairness to  the assessee  but also avoid deserving complaints that an  order of  which  the assessee was not aware of forms the basis  of proceedings under section 34."

     Relying  on  these  two decisions of the  Madras  High Court  in M.Ct.  Muthuraman and V.S.  Sivalingam  Chettiar’s

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8  

cases  Kerala  High  Court in Commissioner  of  Agricultural Income-Tax,  Kerala  vs.  K.H.  Parameswara Bhat [(1974)  97 ITR  190] took somewhat a similar view.  Kerala Agricultural Income  Tax Appellate Tribunal under the Agricultural Income Tax  Act,  1950, however, had taken the view that since  the order  of "nil" assessment had not been communicated to  the assessee,  the  notice under Section 35 was ab initio  void. The  ground for the decision was that as far as the assessee was   concerned,  the   assessement  proceedings  originally commenced  were  still  pending because the order  of  "nil" assessment  had not been communicated to the assessee.  High Court  said  that  the  view   taken  by  the  Tribunal  was erroneous.  It said :  "The scheme of the Act indicates that the  making  of  an  assessment naturally  by  an  order  is different  from the communication of the assessment order to the  assessee.   There is no specific provision in  the  Act enjoining  that an assessment order must be communicated  to the  assessee.   Nor is there any provision in the  relevant Rules that assessment orders must be communicated.  All that section 30 of the Act requires is that a notice of demand in the  prescribed  form  specifying the sum payable  shall  be served  on  the  assessee when a tax or penalty  is  due  in consequence  of an order passed under the Act.  But it is of course  not  only desirable but necessary that an  order  of assessment  should be communicated to the assessee.  The Act itself   envisages   service  of   the   assessment   order. Sub-section  (3) of section 31 for instance provides that an appeal  from  the  order of assessment  shall  be  presented within  a period of thirty days from the date of service  of the  order.   Apart from this, the assessee is  entitled  to know the reasoning for imposing tax or penalty on him and he would  be able to exercise his right of appeal, if any, only if  the order is communicated to him.  But the questgion  is not  whether  it  is either desirable or necessary  that  an order  of assessment should be communicated, but whether the lack of communication of the order would make the order void or  would  have  the  result   of  keeping  the   assessment proceedings  pending.   We conceive that once an  order  had been  passed by the officer, it is not open to him to modify or  alter  that  order  even  if  the  order  had  not  been communicated to the assessee, without adopting the procedure prescribed by section 35 or section 36."

     In  Kalyankumar  Ray vs.  Commissioner of  Income  Tax [(1991)  191 ITR 634] this Court said that the  "assessment" is  one integrated process involving not only the assessment of  the total income but also the determination of the  tax. It  said that when the Income Tax Officer first draws up  an order   assessing  the  total   income  and  indicating  the adjustments  to  be made, directs the office to compute  the tax  payable  on that basis and then approves of it,  either immediately  or some time later, no fault can be found  with the  process,  though it is only when both  the  computation sheets  are  signed or initialled by the Income-tax  Officer that  the  process  described  in  section  143(3)  will  be complete.   Section  143(3)  mandates  that  the  Income-tax Officer  "shall, by an order in writing, make an  assessment of  the total income or loss of the assessee, and  determine the sum payable by him on the basis of such assessment".

     In  Commissioner  of Income-Tax, Madras vs.   M.K.K.R. Muthukaruppan  Chettiar  [(1970) 78 ITR 69] it was  observed that  it  was manifest that notice under Section 34  of  the Income-Tax  Act,  1922 for reassessment could not be  issued unless  the  returns  which  had  already  been  filed  were

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8  

disposed  of.   In that case the Income- tax Officer by  his order  closed  the assessment as "no assessment"  and  added that  since  there  was  no  separate  income,  the  pending proceedings would be closed as N.A.  and for income-tax year 1953-  54  the  file would be removed and clubbed  with  the family  file F.  1005-A.  This Court said that the order  of the Income-tax Officer should be interpreted in the light of the  circumstances  in  which that order was passed  and  so interpreted  "it  appears to us that the Income-tax  Officer did not intend to conclude the proceedings before him".

     An order under Section 237 of the Act is appealable as provided  in clause (k) of sub-section (1) of Section 246 of the  Act.   Section  249 prescribes  limitation  for  filing appeal.   Sub-section (1) of Section 249 is relevant and  it is  as  under :  "249.  (1) Every appeal under this  Chapter shall be in the prescribed form and shall be verified in the prescribed  manner (2) The appeal shall be presented  within thirty days of the following date, that is to say (a) where the appeal relates to any tax deducted under sub-section (1) of section 195, the date of payment of the tax, or (b) where the appeal relates to any assessment or penalty, the date of service  of the notice of demand relating to the  assessment or  penalty :  Provided that, where an application has  been made  under  section  146 for reopening an  assessment,  the period from the date on which the application is made to the date  on which the order passed on the application is served on the assessee shall be excluded, or (c) in any other case, the  date  on  which intimation of the order  sought  to  be appealed against is served."

     There  is  difference  in  clauses   (b)  and  (c)  of sub-section (2) of Section 249 of the Act.  Return of income filed  in the form prescribed along with an application  for refund  under  Section  237 of the Act is  a  valid  return. There  is no stopping the Income Tax Officer to complete the assessment  on the basis of return so filed.  It may be that the Income Tax Officer may limit the scope of examination of the  return to satisfy himself regarding the correctness  of the  amount  claimed as refund.  For that purpose,  he  will examine  if the tax paid by the assessee exceeds the  amount of  tax for which he is chargeable.  If it is found that the Income  was  "nil", he will direct refund be granted to  the assessee for any amount of tax paid.  That will certainly be assessment.   Filing of return in the form prescribed  under Section  39 of the Act along with the application for refund is  not  an empty formality.  It assumes importance if  such return  had not been filed earlier.  We have reproduced  the note/order dated November 10, 1965 on the file pertaining to assessment  year  1963-64.  In the file for assessment  year 1963-63  there  is another note which is as under:   "Please see my note in 1963-64 file.  Refund to be considered in the hands of the beneficiaries."

     The  mere glance at this note would show that it could not be said that the Income Tax Officer gave finality to the refund since no refund is granted either in the hands of the trust  or  in  the  hands of the beneficiaries.   It  is  an inconclusive  note  where  the Income Tax Officer  left  the matter  at  the stage of consideration even with  regard  to refund  in  the hands of the beneficiaries.  This  note  was also  not communicated to the trustees.  When we examine the note  dated November 10, 1965 on the file of 1963-64 nothing flows  from that as well.  In any case if it is an order, it

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 8  

would  be  appealable under Section 249 of the  Act.   Since period  of limitation starts from the date of intimation  of such  an  order,  it  is imperative that such  an  order  be communicated  to  the assessee.  Had the Income-tax  Officer passed  any final order, it would have been communicated  to the  assessee within a reasonable period.  In any case, what we  find is that the note dated November 10, 1965 is  merely an  internal endorsement on the file without there being  an indication  if  the  refund  application  has  been  finally rejected.   By  merely  recording that in  his  opinion,  no credit  for  tax  deducted at source is to  be  allowed  the Income  Tax  Officer  cannot  be said  to  have  closed  the proceedings  finally.  Decisions referred to by the  revenue are  of  no help in the present case.  We are, thus, of  the opinion  that during the pendency of the return filed  under Section  139 of the Act along with refund application  under Section  237  of  the Act action could not have  been  taken under  Section  147/148  of  the Act.   Our  answer  to  the question,  therefore, is in the negative, i.e., against  the Revenue.  The appeal is accordingly allowed with costs.