Hungerford
Investment Trust Ltd. Vs. Income Tax. Officers & Ors [1998] INSC 102 (17 February 1998)
Sujata
V. Manohar, D.P. Wadhwa Mrs. Sujata V. Manohar. J.
ACT:
HEAD NOTE:
THE
17TH DAY OF FEBRUARY, 1998 Present:
Hon'ble
Mrs. Justice Sujata V.Manohar Hon'ble Mr. Justice D.P. Wadhwa Mr. Shanti Bhushan,
Sr, Advocate and mr. Prashant Bhushan, Advocate with him for the appellant. Mr.
K.N. Shukla, Sr. Advocate and Mr. B.K. Prasad, Advocate with him for the
respondents.
The
following Judgment of the Court was delivered:
The
appellant, M/s. Hungerford Investment Trust Ltd. was, at all material times, a
non-resident company having its registered office at Singapore. The appellant company owned 100%
share in M/s. Turner Morrison and Company Ltd. which was a comp[any
incorporated in India. The present appeals are concerned
with assessment years 1949-50, 1950-51 and 1951-52.
An
order under Section 23A of the Income-tax Act, 1922, before its amendment in
1955 was passed by the Income-tax Officer in the case of M/s. Turner Morrison
and Company Ltd. as a result of which the undistributed portion of the
assessable income of M/s. Turner Morrison and Company Ltd. was deemed to have
been distributed as dividends among its shareholders for assessment years
1949-50, 1950-51 and 1951- 52. The dividend deemed to have been so received by
the appellant-company as shareholder for the assessment years 1949-50, 1950-51
and 1951-52 was sough to be subjected to income-tax by the Income-tax Officer
under Section 34 of the Income-tax Act, 1922. In the past an assessment had
been made on M/s. Turner Morrison and Company Ltd. was deemed to have been
distributed as dividends among its shareholders for assessment years 1949-50,
1950-51 and 1951-52. The dividend deemed to have been so received by the
appellant- company as shareholder for the assessment years 1949-50, 1950-51 and
1951-52 was sought to be subjected to income-tax by the Income-tax Officer
under Section 34 of the Income-tax Act, 1922. In the past an assessment had
been made on M/s.Turner Morrison and Company Ltd. as agents for the
appellant-company on a total income which was returned as nil. In vies of the
above order under Section 23A, the Income-tax Officer sought approval of the
Commissioner of Income-tax under Section 34 to tax the appellant-company as an assessee
in respect of assessment years 1949-50, 1950-51 and 1951-52.
After
obtaining approval of the Commissioner of Income- tax under Section 34, the
Income-tax Officer issued a notice for the assessment year 1949-50 to M/s. Turner
Morrison and Company Ltd. as agents of the appellant-company on 24.3.1954. A
return was filed pursuant to the notice by M/s. Tuner Morrison and Company Ltd.
as agents of the appellant- company for the assessment years 1949-50. The
status of the company in the return was described as non-resident and the
income was the dividend deemed to be received under Section 23A by the
appellant-company from M/s. Turner Morrison and Company Ltd. On 29.10.1954 the
Income-Tax Officer made an assessment and issued a demand notice on M/s. Tuner
Morrison and Company Ltd. as agents of the appellant non-resident company.
For
the assessment years 1950-51 and 1951-52, the Income-tax Officer, after
obtaining approval from the Commissioner of Income-tax to issue a notice under Section
34 on the appellant-company as the assessee, issued notices dated 11.2.1955 on
the appellant-company. On 16.2.1955, returns were filed by the
appellant-company. The residence was shown as at Singapore. The returns were accompanied by a covering letter from
M/s. Turner Morrison and Company Ltd.
As
agents o behalf of the appellant-company. On 25.2.1955, the Income-Tax Officer
made an assessment and issued a demand for assessment years 1950-51 and 1951-52
on M/s. Turner Morrison and Company Ltd. as agents of the appellant- company.
Thereupon
M/S. Turner Morrison and Company Ltd. challenged the assessment orders so made
for the three assessment years before the Appellate Assistant Commissioner. The
Appellant Assistant Commissioner, by his order dated 29.11.1980, held that the
Income-tax Officer had validly initiated proceedings for assessment years
1950-51 and 1951-52 on the appellant-company. However, he failed to make an
assessment on the appellant-company directly and made an assessment on M/s.
Tuner Morrison and Company Ltd. as agents of the appellant. He held that such
an assessment on the agent of a non-resident company was bared by limitation in
the present case under the second proviso to Section 34(1) of the Income-tax
Act, 1922. He directed the Income-Tax Officer to make a fresh assessment on the
appellant-company on the basis of the valid returns already furnished by the
appellant-company. In respect of assessment year 1949-50, the Appellate
Assistant Commissioner held that the notice had been issued within the period
of limitation.
However,
the proceedings should have been taken against the appellant-company directly.
He, therefore, directed the Income-tax Officer to make a fresh assessment on
the appellant-company from the stage of notice.
Accordingly,
on 26th of October, 1961, three notices were issued on the appellant-company by
the Income-tax Office for the three assessment years. The appellant-company
challenged these notice by filling a writ petition before the Calcutta High
Court being writ Petition No. 1/1962. A learned Single Judge of the Calcutta
High Court by his order dated 31.1.1972 dismissed the writ petition, holding
that the assessment proceedings against the appellant-company were validly
commenced by notices dated 26.10.1361. The appeal of the appellant-company
before a Division Bench of the Calcutta High Court was also dismissed by its
judgment and order dated 13.8.1982. Hence, the present appeals have been filed
before us.
The
appellant-company contends that the Appellate Assistant Commissioner had no
jurisdiction to give directions under Section 31 to the Income-Tax Officer to
make the assessments on the appellant-company. Therefore, the notices which
have been issued against the appellant- company on 26.10.1961 are beyond the period
prescribed by Section 34 of the Income-tax Act, 1922. According to the
appellant-company, since the direction given by the Appellate Assistant
Commissioner is not covered by Section 31, the second provision to Section
34(3) lifting the embargo of limitation in such cases is not attracted.
The
Appellate Assistant Commissioner by his order dated 29.11.1960 gave the
following directions:
"In
view of the various reasons discussed above the assessment for 1949-50 made by
the I.T.O. on the Resident Company M/s. Turner Morrison and Company Ltd. as
agents of the Non-Resident Company M/s.
Hungerford
Investment Trust Ltd. in order to the tax the deemed dividend under Section 23A
is set aside and the I.T.O. is directed to make a direct assessment on the
Non-Resident Company and, therefore, the I.T.O. is direct to make the
assessment direct on the Non-resident Company to tax the deemed dividend under
Section 23A.
In
connection with the assessment for 1950-51 and 1951-52. the notices under
Section 34 were validly issued taking the assessee as Non-resident Company
directly and the returns of income were also submitted showing the assessee as
Non-resident Company and, therefore, the proceedings are set aside from the
stage of issue of notice under Section 23(2) and the I.T.O. is directed to make
the assessment on the Non-Resident Company after giving fresh opportunity to
the assessee under Section 23(2)." Pursuant to these directions the
Income-tax Officer has issued two notices dated 26.10.1961 in respect of
assessment years 1950-51 and 1951-52 on the appellant-company under Section
23(2) of the Income-tax Act, 1922. The Income-Tax Officer has also issued a
notice dated 26.10.1961 on the appellant-company under Section 34 of the
Income-tax Act for the assessment year 1949-50.
Under
Section 34(1)(a) of the Income-tax Act, 1922, if the Income-tax Officer has
reason to believe that by reason of the omission or failure on the part of an assessee
to make a return of his income under Section 22 for any year or to disclose
fully and truly all material facts necessary for his assessment for that year,
income chargeable to income- tax has escaped assessment for that years, or has
been under-assessed etc, as set out therein, the Income-tax Officer can serve
on the assessee a notice and proceed to assess or re-assess such income.
Similarly, under Section 34(1)(b), notwithstanding that there has ben no
omission or failure as mentioned in Clause (a) on the part of the assessee, if
the Income-tax Officer has, in consequence of information in his possession,
reason to believe that income chargeable to income-tax has escaped assessment
for any year, or has been under-assessed he can serve on the assessee a notice
and proceed to assess or re-assess such income as specified in that section. The
period prescribed at the material time for issuing notice was eight years in
the cases falling under Section 34(1((a) and four years for cases falling under
Section 34(1)(b). The second proviso to Section 34(1), at the material time,
provided that the expiry of two years from the relevant assessment year if the
person on whom the assessment or re-assessment is to be made in pursuance of
the notice is a person deemed to be the agent of a non-resident person under
Section 43.
The
second proviso to Section 34(3), however, at the material time provided as
follows:
"Provided
further that nothing contained in this Section 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
reassessment 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."
[Underlining ours] This is how the second proviso to Section 34(3) stood after
its amendment in 1953 by the Income-tax (Amendment) Act of 1953 with effect
from 1st of April, 1952. The appellant-company contends that this proviso has
no application in the present case because the direction given by the Appellate
Assistant Commissioner under Section 31 is a direction to assess a stranger to
the assessment proceedings against M/s. Turner Morrison and Company Ltd. and
hence it is not covered by the second proviso to Section 34(3).
Since
the impugned notices are dated 26.10.1961, and pertain to assessment years
1949-50 to 1951-52, it is clear that but for this proviso, the notices would be
beyond the period prescribed under Section 34 of the Income-tax Act, 1922. The
second proviso to Section 34(3) lifts the bar of limitation when, inter alia,
an assessment or reassessment is made on an assessee or any person in
consequence of or to give effect to any finding or direction contained in an
order under Section 31.
In the
present case the original assessment orders were made on M/s. Turner Morrison
and Company Ltd. as agents of the appellant-company. The order of the Appellate
Assistant Commissioner giving directions to assess the appellant- company was
passed in the appeals of M/s. Turner Morrison and Company Ltd. against the
orders of assessment for the said three assessment years. Can the
appellant-company on whom the notices have been issued pursuant to the
Appellant Assistant Commissioner's order and directions f 29.11.1960, come
within the scope of phrase "the assessee or any person" in respect of
whom any direction can be given under Section 31? The scope of this second
proviso to Section 34(3) was examined by a Constitution Bench of this Court in
the case of S.C. Prashar & Anr. v. Vasantsen Dwarkadas & Ors. [(1963)
49 ITR 1]. This Court, examining the second proviso to sub- section (3) of
Section 34 which came into effect from 1st April, 1952, said that it patently introduced
an unequal treatment in respect of some out of the same class of persons. Those
whose liability to pay tax was discovered by one method would be proceeded
against at any time and no limitation would apply in their case and in the case
of others the limitation laid down by sub-section (1) of Section 34 would
apply. Referring to the distinction made by the High Court in that case on a
somewhat narrower ground, this Court observed that so far as assesses were
concerned, there might be a rational ground of distinction because appeal
proceedings etc might take a long time and the assessee being a party to the
appeal could not complain of such delay. Therefore, an assessee did not occupy
the same position as strangers. This Court, therefore, held that the proviso,
in so far as it affected strangers, must be held to be ultra vires as violating
Article 14 of the Constitution.
The
same Bench delivered another judgment on the same day in the Commissioner of
Income-tax, Bihar & Orissa v. Sardar Lakhmir Singh [(1963) 49 ITR 70] in
which it affirmed its finding in S.C. Prashar's case (supra). In the case of
S.C. Prashar (supra), the assessee before the Tribunal was VAsantsen Dwarkadas
as representing his deceased father. The Tribunal in appeal held that the
income in question should be deleted from Dwarkadas's income. If the Income-tax
Officer can include the same in the income of the firm of Purshottam Laxmidas
(of which Dwarkadas was a partner) he is at liberty to do so. He can then
apportion the income of Purshottam Laxmidas amongst the partners thereof as
provided in Section 23(50 of the Act. Thereupon the Income-tax Officer served a
notice under Section 34 on the firm of Purshottam Laxmidas. This Court held
that the firm of Purshottam Laxmidas was not before the Tribunal and,
therefore, the firm was no batter than a stranger who was in some way
associated with the assessee. Therefore, the second proviso to Section 3493)
would have no application to the firm and the notice under Section 34 which was
issued on the firm of Purshottam Laxmidas was barred by limitation.
In the
second case of Sardar Lakhmir Singh (supra), the assessee and his father had
filed separate returns of income in their individual capacity. But the
Income-tax Officer amalgamated their income and assessed the total income as
the income of the Hindu Undivided Family. He did not make any protective
assessment with regard to the separate income shown in the return of the assessee.
The Appellate Assistant Commissioner set aside the assessment of the Hindu
Undivided Family. Thereafter, the Income-tax Officer made an assessment on the assessee
in individual capacity on the basis of the original return filed by him. This
was held to be barred by limitation.
In the
subsequent case, however, of Income-tax Officer, A-Ward, Sitapur v. Murlidhar Bhagwan
Das [52 ITR 335], a Constitution Bench of this Court considered the ratio laid
down in S.C. Prashar's case (supra). This Court observed (p.346) that the
expression "any person" in the second proviso to Section 34(3) in its
widest connotation may take in any person, whether connected or not with the assessee,
whose income for any year has escaped assessment; but this construction cannot
be accepted. For the said expression is necessarily circumscribed by the scope
of the subject-matter of the appeal or revision, as the case may be. That is to
say, that person must be one who would be liable to be assessed for the whole
or a part of the income that went into the assessment of the year under appeal
or revision.
"If
so Construed, we must turn to Section 31 to ascertain who is that person other
than the appealing assessee who can be liable to be assessed for the income of
the said assessment year. A combined reading of Section 30(1) and Section 31(3)
of the Act indicated the cases where persons other than the appealing assessee
might be affected by orders passed by the Appellate Commissioner. Modification
or setting aside of assessment made on a firm, joint Hindu family, association
of persons, for a particular year may affect the assessment for the said year on
a partner or partners of the firm, member or members of the Hindu undivided
family or the individual, as the case may be. In such cases though the latter
are not eo nomine parties to the appeal, their assessments depend upon the
assessments on the former. The said instances are only illustrative. It is not
necessary to pursue the matter further. We would, therefore, hold that the
expression "any person" in the setting in which it appears must be
confined to a person intimately connected in the aforesaid sense with the
assessments of the year under appeal." Therefore, if the person against
whom notices are issued under Section 34 pursuant to a direction given by the
Appellate Assistant Commissioner under Section 31, is a person intimately
connected with the original assessee, the period of limitation will not apply
to a notice issued against him under Section 34. He would be covered by the
phrase "assessee or any other person" under the second proviso to
Section 34(3).
The
principle laid down in the above case of Murlidhar Bhagwan Das (supra) was
applied by this Court in the case of Commissioner of Income-tax, Patiala V. Ambala
Flour Mills [(1970) 78 ITR 256]. In that case an individual Debi Prasad, had
submitted the returns in various capacities and had appealed against the order
of assessment. The income earned by the assessee was assessed to tax as income
of an association of persons of which, on the findings of the Income-tax
Officer, Debi Prasad, the Tribunal did not exercise its power qua a stranger to
the assessment proceedings. Therefore, this Court held that the period of
limitation would not be applied. The Appellate Assistant Commissioner was
competent to set aside the assessment of an association of persons and to
direct the Income-tax Officer to assess the members individually.
In the
case of Estate of Late Rangalal Jajodia v. Commissioner of Income-tax, Madras [79 ITR 505], the return had been
filed by one Rangalal Jajodia who died before the assessment order was made.
The assessment order showed the name of the assessee as the estate of late Shri
Rangalal Jajodia by legal heirs and representatives -- these being the son, the
(second) wife and her children. No notice, however, was served on the wife.
Therefore, in appeal, a necessary direction was given that notice should be
given to her and after hearing her assessment should be made.
Interpreting
the second proviso to Section 34(3) this Court said that she was no a stranger
to the assessment, she was not merely intimately connected with the assessment.
She was in fact an assessee. Therefore, the second proviso to Section 34(3)
would apply.
In the
case of Commissioner of Income-tax, U.P. v. Mohd. Shakoor Mohd.Bashir [89 ITR
57], one Zahur Bux who was the sole owner of the business gifted his business
to his two sons Mohd. Shakoor and Mohd. Bashir. Zahur Bux died thereafter. The
two sons submitted their returns of income in respect of the business. The
Income-tax Officer, however, rejected their returns and proceeded to assess all
the heirs of Zahur Bux as an association of persons. In appeal, the Appellate
Assistant Commissioner held that the assessee, namely, the association of
persons consisting of all the heirs of Zahur Bux was not liable to be taxed in
respect of the business. He held that the business had been gifted to two sons,
Mohd. Shakoor and Mohd Bashir. He set aside the order of the Income-tax Officer
but directed him to assess the income from various sources in the hands of the
respective persons to whom they arose. The Income-tax Officer thereafter issued
notices to the two brothers. This Court held that the directions which were
given by Appellate Assistant Commissioner did not fall within the scope of
second proviso to Section 34(30 and, therefore, the subsequent notices which
were issued by the Income-tax Officer were barred by limitation. The brothers
to whom the business was gifted were strangers to assessment proceedings
against the association of persons consisting of heirs of Zahur Bux.
In the
present case we have to consider whether the appellant-company is a stranger to
the assessment proceedings against M/s. Turner Morrison and Company Ltd. as
laid down in the case of S.C. PRASHAR (supra) or whether the appellant-company
can be said to be intimately connected with the assessee M/s. Turner Morrison
and Company Ltd. as laid down in the case of Muralidhar Bhagwandas (supra).
The
notices for the assessment years 1950-51 and 1951- 52 were sent to the
appellant-company itself. For the assessment year 1949-50, the notice had been
sent to M/s. Turner Morrison and Company Ltd. as agents of the appellant-
company. Under Section 42 of the Income-tax Act, 1922, income arising whether
directly or indirectly through or from any business in the taxable territories
or through or from any asset or source of income in the taxable territories,
shall be deemed to be income accruing or arising within the taxable
territories; and where the person entitled to the income is not resident in the
taxable territories, shall be chargeable to income-tax either in his name or in
the name of his agent and in the latter case, such agent shall be deemed to be
for all the purposes of this Act the assessee in respect of such income. Thus,
in view of Section 42, in the present case, there was an option to tax either
the appellant-company or its agent M/s. Turner Morrison and Company Ltd.
Therefore, when the initial notices under Section 34 were sent by the
Income-tax Officer in 1954 and 1955, what was sought to be taxed was the income
arising in taxable territories of the non-resident appellant-company. For the
assessment years 1950-51 and 1951-52, the notice was addressed to the appellant
company.
But
even in respect of the assessment year 1949-50, what was sought to be taxed was
the appellant's income or deemed income arising in India. For the assessment
years 1950-51 and 1951-52, the returns were also filed by appellant- company as
an assessee. The status of the assessee was shown as non-resident. It was on
the basis of these returns that the Income-tax Officer proceeded to make an
assessment. For the assessment years 1950-51 and 1951-52, however, he made an
assessment in the name of M/s. Turner Morrison and Company Ltd. as agents of
the appellant-company. For the assessment year 1949-50 the return was filed by
M/s. Turner Morrison and Company Ltd. as agents of the appellant- company. The
status of the assessee was shown in the return as non-resident and the income
which was shown was deemed dividend accruing to the appellant-company as
provided under Section 23A. For the assessment year 1949-50, the assessment was
made on M/s. Turner Morrison and Company Ltd. as agents of the
appellant-company. Whether we look upon M/s. Turner Morrison and Company Ltd.
as an independent assessee or otherwise, the assessment was clearly in respect
of the income of the appellant-company deemed to arise by virtue of Section 23A
in India for that assessment year. Therefore, the appellant-company was
directly concerned with the assessment proceedings and the appeal arising in
those assessment proceedings before the Appellate Assistant Commissioner. The
Appellate Assistant Commissioner directed, for reasons set out in his order,
that the assessments should be made on the appellant-company itself and not on
its agent. This direction cannot be considered as a direction to assess a
stranger. In fact as the original assessment proceedings pertain to the income
of the appellant-company, in any vies of the matter, the appellant- company
must be considered as intimately connected with the assessment proceedings in
which the Appellate Assistant Commissioner gave the impugned directions. The
appellant- company is, therefore, covered by the expression on "assessee
or any person" in the second proviso to Section 34(3).
In the
case of Muralidhar Bhagwandas (supra) this Court gave illustrations of persons
who might be considered as intimately connected with the assessee in the light
of Section 30(1) and Section 31 of the Income-tax Act. This Court referred to
assessment of a partnership firm which may affect the income of individual
partners or the assessment of an association of persons which may affect the
income of the individual or the assessment of a joint Hindu family which may
affect the assessment of members of the Hindu joint family. It, however, made
it clear that these instances were only illustrative and not exhaustive.
The
appellant-company, however, contends that "any person" in the said
proviso would cover only such persons as were referred to by the Court as
illustrations in Murlidhar Bhagwandas (supra) because they are also referred to
in Section 31(4). We do not see any merit in this contention.
Under
Section 31(3), in disposing of an appeal the Appellate Assistant Commissioner
may, inter alia, set aside the assessments and "direct the Income-tax Officer
to take a fresh assessment after making such further inquity as the Income-tax
Officer thinks fit or the Appellate Assistant Commissioner may direct and the
Income-tax Officer shall thereupon proceed to make such fresh assessment and
determine where necessary the amount of tax payable on the basis of such fresh
assessment." Under sub-section (4) of Section 31, where as the result of
an appeal any changes are made in the assessment of a firm or association of
persons or a new assessment of a firm or association of persons is ordered to
be made, the Appellate Assistant Commissioner may authorities the Income-tax
Officer to amend accordingly any assessment made on any partner of the firm or
any member of the association. This provision under Section 31(4) cannot be
read as limiting the scope of the words "any person" in the second
proviso to Section 34(3) as referring only to those persons who are covered by
Section 31, sub-section (4). The words are wide enough to cover all directions
under Section 31 including those relating to the assessment of a person
intimately connected with the assessee in the sense as laid down by this Court
in the case of Muralidhar Bhagwandas (supra). Whether the person is so
connected will depend on the facts of each case. The illustrations given in the
case of Murlidhar Bhagwandas (supra) do not limit the words "any
person", but are only illustrative. The only reason why the words
"any person" are read down to exclude total strangers, is to prevent
infringement of Article 14 of the Constitution.
The
directions in the present case, therefore, given by the Appellate Assistant
Commissioner by his order of 29.11.1960 are directions property given under
Section 31 of the Income-tax Act, 1922 and the notices, therefore, which are
issued on 25.10.1981 by the Income-tax Officer pursuant to the directions so
given, cannot be considered as notices on total strangers barred by limitation.
The High Court was, therefore, right in dismissing the writ petition.
The
appeals are accordingly dismissed with costs.
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