Messrs Chatturam Horilram Ltd. Vs.
Commissioner of Income Tax, Bihar and Orissa  INSC 30 (18 April 1955)
BOSE, VIVIAN SINHA, BHUVNESHWAR P.
CITATION: 1955 AIR 619 1955 SCR (2) 290
I Indian Income Tax Act, 1922 (Act XI of
1922), s. 34Assessment set aside owing to Indian Finance Act of 1939 not being
in force during the assessment year-Indian Finance Act of 1939 brought into
force retrospectively by Bihar Regulation IV of 1942-Fresh notice under s. 34
issuedWhether such fresh notice valid.
The appellant in this appeal had been
assessed to Income Tax which was reduced on appeal but that assessment was set
aside by the Income Tax Appellate Tribunal on the ground that the Indian Finance
Act of 1939 was not in force during the assessment year in Chota Nagpur. On a
reference by the Tribunal the High Court con-firmed the setting aside of this
assessment. By the promulgation of Bihar Regulation IV of 1942 by the Governor
of Bihar (which was assented to by the Governor-General) the Indian Finance Act
of 1939 was brought into force in Chota Nagpur retrospectively as from the 30th March 1939. On the 8th February 1944 the Income Tax Officer passed an order in
pursuance of which a fresh notice was issued under s. 34 which resulted in the
assessment of the appellant to income tax. The question for determination in
this appeal was whether the notice under s. 34 was validly issued.
Held (i) that for the purposes of s. 34 of
the Act the income, profits or gains sought to be assessed were chargeable to
income tax according to the scheme of the Act and the provisions of ss. 3 and 4
of the Act;
(ii) that it was a case of chargeable income
escaping assessment within the meaning of s. 34 and was not a case of mere
non-assessment of income tax because the earlier assessment proceedings in the
present case had in fact been taken but failed to result in a valid assessment
owing to some lacuna which was not attributable to the assessing authorities.
C.I.T., Bombay v. Sir Mahomed Yusuf Ismail
( 12 I.T.R. 8), Fazal Dhala v. C.I.T., B. & O. ( 12 I.T.R.
341), Baghavalu Naidu & Sons v. C.I.T.,
Madras ( 13 I.T.R. 194), Raja Benoy Kumar Sahas Boy v. C.I.T., West
Bengal ( 24 I.T.R. 70), Chatturam v. C.I.T., Bihar ( F.C.R. 116),
Whitney v. Commissioners of Inland Revenue ( A.C. 37), C.I.T. Bombay
& Aden v. Khemchand Ramdas ( 6 I.T.R. 414 at 428), Sir Rajendranath
Mukherjee v. C.I.T., Bengal ( 2 I.T.R. 71), Madan Mohan Lal v. C.I.T.,
Punjab ( 3 I.T.R. 438), C.I.T., Bombay v. Pirojbai N. Contractor (
5 I.T.R. 338), Kunwar291 Bishwanath Singh v. C.I.T., C.P. ( 10 I.T.R.
322), Raja Bahadur Kamakshya Narain Singh v. C.I.T. B. & 0. ( 14
I.T.R. 683) and Chatturam v. C.I.T., B. & 0. ( 14 I.T.R. 695),
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 38 of 1954.
Appeal from the Judgment and Decree dated the
14th day of March 1951 of the High Court of Judicature at Patna in M.J.C. No.
230 of 1949.
Mahabir Prasad, Advocate-General for the
State of Bihar (R.
J. Bahadur and S. P. Varma, with him'), for
C. K. Daphtary, Solicitor-General for India
(Porus A. Mehta and P.O. Gokhale, with him), for the respondent.
1955. April 18. The Judgment of the Court was
delivered by JAGANNADHADAS J.-This is an appeal by the assessee on leave
granted under section 66-A of the Indian Income-Tax Act.
The assessee by name Chatturam Horilram Ltd.,
who is the appellant before us, is a private limited company carrying on in
Chota Nagpur the business of exporting mica for sale to foreign countries. The
assessment in question is for the year 1939-40 and the accounting year is the
calendar year 1938. These proceedings were initiated on a notice issued to the
assessee under section 34 of the Indian Income-tax Act, 1922, (Act XI of 1922)
(hereinafter referred to as the Act). It is the applicability of this section
to the facts of this case that is the sole matter for consideration in this
appeal. The circumstances under which the above mentioned notice under section
34 was issued are as follows.
The appellant had previously been assessed to
tax on an income of Rs. 1,09,200 for the same year 1939-40. by an order dated
the 22nd December, 1939, which was reduced on appeal by Rs. 31,315. That
assessment was set aside by the Income-Tax Appellate Tribunal on the 28th
March, 1942, on the ground that the Indian Finance Act of 1939 was not in force
during 292 the assessment year 1939-40 in Chota Nagpur, which was a
partially-excluded area. On a reference by the Tribunal at the instance of the
Income-tax authorities, the High Court of Patna agreed with this view and
pronounced on the 30th September, 1943, its judgment confirming the setting
aside of the assessment. Meanwhile, the Governor of Bihar promulgated Bihar
Regulation IV of 1942, Which was assented to by the Governor-General on the
30th June, 1942. By this Regulation, the Indian Finance Act of 1939 (along with
Finance Acts of other years with which we are not concerned) was brought into
force in Chota Nagpur retrospectively as from the 30th March 1939. The relevant
portion of the Regulation was in the following terms.
"The Indian Finance Act, 1939, shall be
deemed to have come into force in the area to which this Regulation extends on
the 30th day of March, 1939". On the 8th February, 1944, the Income-tax
Officer passed an order as follows:
"Due to recent judgment of the High
Court the assessment under section 23(3) stands cancelled and with it the
notice under section 34 issued in this case becomes ineffective and is
withdrawn. Assessee derives income from mica mining and dealing, money lending,
mining rents and non-agricultural sources of zamindary, and this has escaped
assessment in its entirety. Issue notice under section 22(2) read with section
34 again to file a return of income in the prescribed form and within the
prescribed time, and inform the assessee that the original notice under section
34 has been cancelled".
It may be mentioned, in passing, that the
notice under section 34 which is referred to in the above order as having
become ineffective and as, therefore, withdrawn was a prior one which was
issued on the 8th July, 1941, i.e., during the pendency of the assessee's
appeal relating to the earlier assessment before the Income-tax Appellate
Tribunal. It is not quite clear from the record in what circumstances 'that
notice came to be issued. But it looks probable that it relates to certain
items appearing in the accounts as 293 cash-credits to the tune of four lakhs
which, as will appear presently, were treated in the later proceedings as
concealed income in the absence of any proper explanation by the assessee. This
prior notice under section 34, having been withdrawn, has no bearing on the
question at issue before us in this appeal and has not been relied on by either
side. In pursuance of the order dated the 8th February, 1944, quoted above, a
fresh notice under section 34 of the Act was issued to the appellant on the,
12th February, 1944. The income of the assessee-company was thereupon
determined at a sum of Rs. 4,86,351, which on appeal to the Assistant
Commissioner, was reduced by Rs. 11,187. Out of this amount a sum of Rs.
4,04,618 related to two items of cash-credits appearing in the name of the
partners of the Company which in the absence of any satisfactory explanation,
was treated by the Income-tax authorities as secreted profits of the Company.
Before the Income-tax Appellate Tribunal two points were raised. (1) Whether
the notice dated the 12th February, 1944, under section 34 of the Act was
validly-issued. (2) Whether the Income tax authorities were right in holding
that the cashcredit items were secret profits. Both the points were decided
against the assessee. On the assessee's application to refer both the points
for the decision of the High Court, the Tribunal declined to make a reference
as regards the second point but referred the first for the opinion of the Court
in the following terms:
"Whether in the circumstances of the case,
the notice issued on 12-2-1944 under section 34 of the Indian Income-tax Act
was validly issued for the assessment year 1939-40?" The question was
answered against the assessee by the High Court and hence this appeal before
us. The assessee attempted to reopen the second question relating to secret
profits before the High Court but the learned Judges declined to allow it to be
canvassed, since the Tribunal did not refer the question to them. We are,
therefore, concerned in this appeal only with the question relating to the
validity of the notice 294 issued on the 12th February, 1944, under section 34
of the Act. It is obvious that if this notice is found to be invalid the
assessee would get relief for the entire amount including the amount of secret
The answer to the question which arises for
consideration in this appeal depends on a correct appreciation of the
requirements of section 34 of the Act. Now, it has to be mentioned that section
34 of the Act as it originally stood in the Act of 1922, was amended by Act VII
of 1939 and this was in turn amended by Act XLVIII of 1948. At the relevant
date, i.e., for the assessment year 1939-40, section 34 (1) as amended by Act
VII of 1939 (and before its amendment in 1948) was in force. It was as follows:
"If in consequence of definite
information which has come into his possession the Income-tax Officer discovers
that income, profits or gains chargeable to income-tax have escaped assessment
in any year, (or have been underassessed, or have been assessed at too low a
rate, or have been the subject of excessive relief under this Act) the
Income-tax Officer may, (in any case in which be has reason to believe that the
assessee has concealed the particulars of his income or deliberately furnished
inaccurate particulars thereof, at any time within eight years and) in any
other case at any time within four years of the end of that year, serve on the
person liable to pay tax on such income, profits or gains, or, in the case of a
company, on the principal officer thereof, a notice containing all or any of
the requirements which may be included in a notice under sub-section (2) of
section 22, and may proceed to assess or re-assess such income, profits or
gains and the provisions of this Act shall, so far as may be, apply accordingly
as if the notice were a notice issued under that sub-section".
Omitting from the above sub-section those
portions which are inapplicable to the facts of the present case -marked out
within brackets-it may be seen that the facts which require to be established
for the validity of the notice under this sub-section are (I' the income,
profits or gains sought to be assessed should be chargeable to income-tax and
have escaped assessment in any year, and (2) the Income-tax Officer should have
discovered it in consequence of definite information which has come into his
possession. The contention of the learned counsel for the appellant is that,
with reference to the facts of this case, none of these conditions can be said
to have been satisfied. It is urged that the income sought to be assessed under
these proceedings was not, as a fact, chargeable to income-tax during the
assessment year 1939-40.
It is said that in any case there can be no
question of the income having escaped assessment because, as a fact, the
income-tax authorities did proceed to assess the income and that what happened
is that the proceedings became infructuous by reason of the High Court having
pronounced them to be void. It is also contended that there is no question of
discovery of any relevant fact or information, because the non-assessment of
the income of the assessee for the period in question was in spite of all the
information relating to the income of the assessee having been previously
furnished and being in the possession of the Income-tax Officer as would appear
from the order of the Officer dated the 22nd December, 1939. It is convenient
to deal with this last objection in the first instance.
It may be true that all the information
relating to the relevant income of the assessee which is now sought to be taxed
was in the possession of the Income-tax Officer in the year 1939 itself when
the return was submitted in compliance with the notice under section 22(2) of
the Act then issued.
But what was required under section 34(1) was
not merely fresh information as to the income that escaped assessment but
information as to the fact of escapement from assessment of the chargeable
income. In the present case the incometax authorities proceeded to assess the
appellant in the normal way during the assessment year 1939-40 itself. Those
proceedings became infructuous, by virtue of the decision of the Income-tax
Appellate Tribunal and the decision of the High Court confirming it, which
disclosed that the Indian Finance Act of 1939 was not in operation in 296 the
relevant area at the relevant period and that in the absence thereof no valid
assessment could be made. The fact, therefore, that the income of the appellant
for the relevant year remained without any valid assessment emerged only on the
High Court finally giving its decision that the assessment proceedings
previously taken were invalid. If, in the circumstances, there was
"escapement of chargeable income from assessment"-a question to be
dealt with presently-there can be no doubt that this fact can be reasonably
said to have been discovered by the Income-tax Officer only when he got
definite information as to (1) the passing of the Bihar Regulation IV of 1942
applying the Indian Finance Act of 1939 retrospectively for the relevant
accounting period, and (2) the judgment of the High Court pronouncing prior
proceedings to be invalid It is knowledge of both these facts, together, that
would, with reference to the circumstances of the present case, constitute the
discovery of the relevant fact in consequence of definite information received
by the Income-tax Officer. The information as to both these facts taken
together could only be after the decision of the High Court on the 30th
September, 1943. As already stated, the notice under section 34(1) , whose
validity is in question, was based on the order of the Income-tax Officer dated
the 8th February, 1944, after the judgment of the High Court was pronounced.
That order which has been extracted above,
shows clearly that it was in consequence of the judgment of the High Court in
the back-ground of the promulgation of Regulation IV of 1942 that fresh action
under section 34 (1) -was being initiated.
A number of cases (C.I. T. Bombay v. Sir
Mahomed Yusuf Ismail(1); Fazal Dhala v. C.I. T., B.& 0. Raghavalu Naidu
& Sons v. C.I. T., Madras(3); and Raja Benoy Kumar Sahas Roy v. C. I. T.,
West Bengal(,) have been cited before us to show how the phrase "definite
information" and the word "discovery" used in this section have
been interpreted by the various (1)  12 I.T.R. S.
(3)  13 I.T.R. 194.
(2)  12 I.T.R. 341.
(4)  24 I.T.R. 70.
297 High Courts. It is unnecessary to deal
with these cases at any length. There is here no question as to any new subjective
facts such as change of opinion consequent on a correct appreciation of law by
the very same, or another, or higher officer, that is pressed into service as
bringing about "definite information " and "discovery". We
are quite clear that the promulgation of the Regulation and the decision of the
High Court are objective facts, information regarding which became available to
the Income-tax Officer when he passed the order dated the 8th February, 1944,
and it is only when these facts came to his knowledge, that the Income-tax
Officer can be said to have discovered that chargeable income escaped
assessment in the relevant year.
The main question that requires consideration
in this case is whether, on the facts, it can be said that "income
chargeable to income-tax has escaped assessment in the relevant year". The
contention of the learned counsel for the appellant is that during the relevant
year 1939-40 the income was not chargeable to tax as a fact and that the
retrospective operation of the Finance Act for the relevant year by virtue of a
later legislation does not make a difference for this purpose. To decide this
question it is necessary to have a clear idea of the scheme of the Incometax
Act and its correlation to the Finance Act of each year.
The Income-tax Act is a standing piece of
legislation which provides the entire machinery for the levy of income-tax.
The Finance Act of each year imposes the
obligation for the payment of a determinate sum for each such year calculated
with reference to that machinery. As has been pointed out by the Federal Court
in Chatturam v. C.I. T., Bihar(1) (quoting from the judgment of Lord Dunedin in
Commissioners of Inland Revenue (2).
"there are three stages in the imposition of a tax. There is the declaration
of liability, that is the part of the statute which determines what persons in
respect of what property are (1)  F.C.R. 116 at 126.
(2)  A.C. 37.
38 298 liable. Next, there is the assessment.
Liability does not depend on assessment. That, ex hypothesi, has already been
fixed. But assessment particularises the exact sum which a person liable has to
pay. Lastly, come the methods of recovery if the person taxed does not
voluntarily pay". The same idea has been expressed in slightly different
language by Lord Romer in the judgment of the Privy Council reported in C.I.T.,
Bombay & Aden v. Khemchand Ramdas(1). Chapter III of the Income-tax Act
headed "Taxable Income" contains the various provisions with
reference to which taxable income is determined. The tax is leviable under
section 3 and is in respect of the total income of an assessee in the previous
year. The total income is defined in section 2, sub-section (15). The
application of the Act to the total income in the hands of an assessee is
governed by sections 4, 4-A and 4-B and is determined with reference to
concepts relating to residence, receipt and accrual, as indicated therein.
Section 3, under which the actual charge of income-tax arises, is as follows:
"Where any Central Act enacts that
income-tax shall be charged for any year at any rate or rates, tax at that rate
or those rates shall be charged for that year in accordance with, and subject
to the provisions of, this Act in respect of the total income of the previous
year of every individual, Hindu undivided family, company and local authority,
and of every firm and other association of persons or the partners of the firm
or the members of the association individually".
It is by virtue of this section that the
actual levy of the tax and the rates at which the tax has to be computed is
determined each year by the annual Finance Acts. Thus, under the scheme of the
Income-tax Act, the income of an assessee attracts the quality of taxability
with reference to the standing provisions of the Act but the payability and the
quantification of the tax depend on the passing and application of the annual
Finance Act. Thus, income is chargeable to tax independent of the passing of
the (1)  6 I.T.R. 414 at 428.
299 Finance Act but until the Finance Act is
passed no tax can be actually levied. A comparison of sections 3 and 6 of the
Act shows that the Act recognises the distinction between chargeability and the
actual operation of the charge.
Section 6 says "save as otherwise
provided by this Act, the following heads of income, profits and gains, shall
be chargeable to income-tax in the manner hereinafter appearing, etc."
while section 3, as already quoted above, says that "where any Central Act
enacts that income-tax shall be charged for any year at any rate or rates, tax
at that rate or those rates,, shall be charged for that year, etc."
Though, no doubt, sections 3 and 4 are the charging sections in the Act as
pointed out in Chatturam v. C.I.T., Bihar(1) at page 125, the wording of section
3 assumes the pre-existence of chargeable income as indicated in section
6. Hence, according to the scheme of the Act
the quality of chargeability of any income is independent of the passing of the
Finance Act. In this view, therefore, though, as a fact, on account of the
Finance Act not having been extended to the relevant area during the year
1939-40, legal authority was then lacking for the quantification of the tax and
imposition of the liability therefor, the income of the assessee for the
relevant year was nonetheless chargeable to tax at the time, in the sense
explained above. Indeed, it can also be said that the very fact of Regulation
IV of 1942, having brought the Finance Act of 1939 into operation
retrospectively, in this area, has factually brought about, in any case, the
chargeability of the tax during that very year. The relevant portion of the
Regulation says that "the Indian Finance Act of 1939 shall be deemed to
have come into force in the area to which this Regulation extends on the 30th
day of March, 1939". By virtue of this deeming provision the Indian
Finance Act of 1939 must be assumed even factually to have come into operation
on the date specified and the tax must be taken to have become chargeable in
that very year, though the actual liability for payment could not arise until
proper and (1)  F.C.R. 116.
300 valid steps 'are taken for quantification
of the tax. The contention, therefore, of the appellant that the income was not
chargeable to tax in the year 1939-40 cannot be accepted.
The next question that arises is whether the
income, though chargeable to tax in the year, can be said to have escaped
assessment in the relevant year. The argument of the learned counsel for the
appellant is that since assessment proceedings had in fact been taken during
the year 1939-40 by an order of assessment dated the 22nd December, 1939, it
cannot be said that the income "escaped" assessment. He urges that
what happened was that, in spite of assessment having been made, the assessment
proceedings became infructuous on account of the decision of the Income-tax
Appellate Tribunal setting aside the same and High Court agreeing with it. He
contends that, in the circumstances, this is no more than a failure of the
assessment proceedings but that it is not an escapement from assessment. He
relied upon the Privy Council case in Sir Rajendranath Mukherjee v. C.I. P.,
Bengal(1), where their Lordships say that "the expression 'has escaped
assessment' cannot be read as equivalent to 'has not been assessed"' and
that "such a reading gives too narrow a meaning to the word 'assessment'
and too wide a meaning to the word 'escaped"'. Learned counsel for the
respondent relies on a number of subsequent 'cases of the various High Courts
(Madan Mohan Lal v. C.I.T., Punjab(1); C.I. T., Bombay v. Pirojbai N. Contractor(3);
and Kunwar Bishwanath Singh v. C.I. T., C.P.(4) ) which have explained. this
decision of the Privy Council and pointed out that the particular passage in
that judgment which is relied upon bad reference to the, facts of that case,
viz., the proceedings by way of initial assessment being still pending. While
no doubt the Privy Council case is thus distinguishable, the contention of the
learned counsel for the appellant that the escapement from assessment is not to
be equated to (1)  2 I.T R. 71 at 77.
(3)  5 I.T.R. 338.
(2)  3 I.T.R. 438.
(4)  10 I.T.R. 322.
301 non-assessment simpliciter is not without
force. Here again, it is unnecessary to lay down what exactly constitutes
"escapement from assessment". For the purpose of the present case it
appears to us sufficient to say that, where earlier assessment proceedings had
in fact been taken but failed to result in a valid assessment owing to some
lacuna other than that attributable to the assessing authorities,
notwithstanding the chargeability of income to the tax, it would be a case of
chargeable income escaping assessment and not a case of mere non-assessment of
incometax. The proceedings for assessment in the present case have failed to
result in a valid assessment by virtue of a legal lacuna, viz., the fact of the
Indian Finance Act of 1939 not having been extended to the relevant area for
the relevant assessment year. Learned counsel for the appellant suggests that the
failure of the assessment proceedings in this case must be taken to have been
due to the lapse of the income-tax authorities. It is said that inasmuch as
Regulation IV of 1942 was actually passed during the pendency of the reference
in the High Court in respect of the prior proceedings, the result would have
been different, if the Regulation had been brought to the notice of the High
Court. There is, however, no reason to think so. The High Court's jurisdiction
was only to answer the particular question that was referred to it by the
Income-tax Appellate Tribunal and it is extremely doubtful whether they could
have taken notice of a subsequent legislation and answered a different
question. Learned counsel for the appellant also urged that in any case the deeming
provision enacted in Regulation IV of 1942, may be taken to have validated the
assessment proceedings previously taken in the year 1939 and at best to have
restored the assessment order passed by the Income-tax Officer on the 22nd December, 1939, and confirmed by the Assistant Commissioner. But this overlooks
the fact that the order had in fact been set aside by the Income-tax Appellate
Tribunal and that the setting aside was confirmed by the High Court on the
reference made to it. Admittedly the Regulation was passed after the decision
of the 302 Income-tax Appellate Tribunal. Notwithstanding that the Regulation
IV of 1942 purported to be retrospective) it cannot have the effect of effacing
the result brought about by the decision of the Income-tax Appellate Tribunal
and the High Court on reference, unless there are clear and express words to
that effect. It might have been quite a different matter, if by the date of the
Regulation the assessment proceedings themselves were still pending as in fact happened
with reference to assessment proceedings in this area, in respect of a number
of assessees for the subsequent assessment year, 1940-41, which were pending by
the date of the relevant Regulation and were continued up to their termination.
They were held to be valid both by the High Court and by the Federal Court when
challenged by the assessees. (See Raja Bahadur Kamakshya Narain Singh v. C.I.T.,
B. & O.(1); Chatturam v. C.I. T., B. & O.(1); as also Chatturam v.
C.I.T., Bihar(1). It follows, therefore, that, in our view, the income of the
assessee 'Chargeable to income-tax escaped assessment in the relevant year
The High Court was, therefore, right in
answering as it did the question referred to it.
The appeal accordingly fails and is dismissed
(1) (1946) 14 I.T R. (2) (1946) 14 I.T.R.
(a) 1947 F.C.R. 116 at 126.