Report No. 12
Notes to clauses 152-159
Existing section 34, relating to the power to assess an income which has escaped assessment, has been sought to be simplified in the draft clauses under discussion on the following lines:-
(1) The substantive provision dealing with the power itself, contained in section 34(1) clauses (a) and (b), has been placed in the beginning; the requirement of notice is placed next; and the detailed provisions contained in the various provisos, dealing with the time-limit for the exercise of the power, have been put in separate clause.
(2) Section 34(3), relating to the period within which assessment should be completed, has been placed as a separate draft clause, since it is not confined in its application to an assessment under section 34 itself, but applies to all orders of assessment or reassessment under the Act.
(3) Provisions that have become obsolete, such as sub-sections (1A), (1B), (1C) and (1D), have been omitted. Since the new Act will apply only to assessments made for assessment years subsequent to the commencement of the Act, it is not necessary to repeat these sub-sections in the new Act. Any action that might have to be taken with reference to prior years can be taken even after the commencement of the new Act.
It has been made clear that the power to make a reassessment is subject to the other provisions of the various clauses. This has become necessary in view of the fact that the time-limit, at present dealt with in the provisos, has in the draft been dealt with in separate clauses.
The short expression "income has escaped assessment" has been used in the preceding clause and defined here.
This does not need any comments, since the only change made is the addition of the words "before making the assessment the Income-tax Officer shall" serve a notice.
This is purely consequential on the scheme adopted in the draft to separate the various provisions at present contained in sub-section (1).
General.- The time-limit for the issue of a notice under existing section 34(1) is dealt with in this clause. An attempt has been made to make the provision easier to understand, by stating the various time-limits applicable to the various situations separately. Thus, cases where no time-limit is prescribed, are dealt with first. The case where the time-limit is eight years is dealt with next; and the residuary time-limit of four years, applicable; when the case falls under existing section 34(1)(b), is dealt with at the end.
Sub-clause (1), para (a).- Existing section 34(1), 1st proviso, item (ii)-provides, in effect, that where the income that has escaped assessment exceeds the amount of one lakh of rupees or more, the assessment can be made under this section at any time. For the purpose of computing this sum of one lakh of rupees, income that has escaped assessment either for the relevant assessment year for which the notice is to be issued, or for that year and any other years after to which eight years have elapsed, can be taken into account. The result is, that the longer the period that is allowed to elapse, the more probable becomes the assessability of the assessee under this provision.
Thus, where an income of Rs. 25,000 has escaped assessment for the year 1943-44, the income cannot be assessed under this section in, say, the year 1953. But if the income, for the intermediate years, say 1944-45, is also allowed to escape assessment, the accumulated total of such escaped incomes would give a right to proceed under this section, in, say, the year 1955 (if the accumulated total is one lakh of rupees or more). Since the main object of the provision for time-limit is to ensure that action is taken as early as possible, such a situation cannot be regarded as satisfactory.
In the draft, therefore, an attempt has been made to substitute a simple rule, under which, only the income for the 16 assessment years prior to the year in which the notice is issued, can be taken into account. The minimum amount of one lakh of rupees has been preserved in cases where an aggregation is to be made, but it has also been provided that where the income escaping assessment for the relevant assessment year itself is Rs. 50,000 or more, the power to proceed under this section should be available at any time.
The substitution of this rule has, incidentally, facilitated some simplification of the form of this section also.
The reference to the assessment year ending before the 31st day of March, 1941, has been omitted, since the 16 assessment years preceding the year in which notice may issue, which are referred to in the provision as drafted, will all' be assessment years later than 1939-40, as the new Act will apply only for assessment years subsequent to its commencement.
It is, however, made clear, that for the purpose of computing the accumulated total that has escaped assessment, assessment years under the 1922 Act (i.e. the existing Act) can also be taken into account.
Sub-clause (2).- The restriction contained in existing section 34(1), 2nd Proviso, regarding the issue of notice against the agent of a non-resident, would seem to apply to a notice under clause (a) as well as clause (b) of section 34(1). For this reason, draft sub-clause (1) begins with the words "subject to the provisions of sub-section (2)" and draft sub-clause (2) is framed so as to make it clear that it applies to all notices under section 34(1).
Existing section 34(3), 2nd Proviso, operates not only in relation to the period of completion of assessment, but also in relation to a time-limit for an issue of notice under section 34(1). This is clear from the words "nothing contained in this section limiting the time within which any action may be taken " appearing in the beginning of the Proviso. The Proviso thus acts as an Exception not only to section 34(3), main para, but also to the time-limit under section 34(1). The latter aspect has been dealt with here.
General.- The verbal changes are consequential on the breaking up of the section into various sub-clauses.
Sub-clause (2).- Existing section 34(1), 1st Proviso, clause (iii), says that a notice under clause (a) shall not be issued for any year unless the Commissioner is satisfied that it is a fit case for the issue of such a notice. Apparently, this would apply even where the notice is issued within four years. But since a notice under clause (b) can be issued, within four years, without any such sanction, no harm would be caused if, in cases under clause (a) also, this restriction is made to operate only where the notice is issued after four years. The provision in question has been altered accordingly.
Other changes are verbal and consequential as above.
Sub-clause (1).- Does not need any comments. The verbal changes are consequential as above.
Sub-clause (2).- No change has been made in existing section 34(2).
As to the omission of sub-sections (1A), (1B), (1C) and (1D) of existing section 34, see notes above under this group of clauses under the head "General". Clause 159
This is new. The time-limit for completion of assesssment is at present contained in section 34 itself. Since it is being transferred in the draft to a separate section, it seems desirable to have such a clause to draw attention to the provision relating to time-limit.
Notes to clause 160
Existing section 34(3) has, in the draft, been split up into three sub-clauses. The main provision, imposing the time-limit, has been dealt with in sub-clauses (1) and (2), while the various exceptions have been dealt with separately in sub-clause (3), for the sake of clarity.
Sub-clause (1).- Paragraph (a) does not need any comments. The substitution of the words "assessment year" for 'year' is meant to secure precision.
Paragraph (b) is new and is intended to provide that the time-limit in the case of a notice under existing section 28(3) read with section 28(1)(c) is four years counted from the issue of the notice. It seems desirable that there should be some time-limit in such cases.
Paragraph (c) is new. As already explained in the notes to the draft clause1 corresponding to existing section 22(3), some difficulty has been felt in cases where the assessee files a return under section 22(3) towards the end of the period within which the assessment should be completed. The Department has to complete the assessment without any further investigation, lest the period shall be exceeded. To meet such cases, this paragraph has been added, so that the Department may get at least one year for completing the assessment.
1. Clause 143(4).
Sub-clause (2).- Deals with the limitation in case of assessment and reassessments under section 34.
Sub-clause (3).- The various exceptions contained in existing section 34(3) have been embodied in this sub-clause, and each exception has, for the sake of clarity, been deal, with in a separate item. The various items themselves do not need any detailed comments, since the verbal changes are purely consequential on the breaking up of the exceptions, into different items, as already explained.
One change of substance, however, has to be pointed out. Existing section 34(3) allows the completion of an assessment under section 34(1)(a) at any time. It is desirable that some time-limit should be imposed. The draft proposes a time-limit of 4 years from the end of the assessment year in which the notice is served.
The existing exception for assessments under section 34(1A) has been omitted in the draft, since no such case can arise under the new Act, whose operation will be confined to assessment years subsequent to its commencement.
Explanation 1.- The second proviso to existing section 5, sub-section (7C) has been embodied here. Very often, assessment proceedings are stayed by an order of a court, and in such cases it becomes difficult to complete the assessment within the period limited by section 34(3). A provision has, therefore, been added in the draft to exclude the period during which the proceedings were so stayed, while computing the period of limitation under section 34(3).
Explanations 2 and 3.- Proceedings by way of appeal, revision etc. sometimes result in an order under which the inclusion of a particular item of income in the total income of a particular previous year is disallowed. As a result, it becomes necessary to count that income as a part of the total income of another previous year. Such recomputation should be regarded as consequential on the proceedings by way of appeal etc., and the time-limit under section 34(3) should not be regarded as applicable in such cases.
Similarly, proceedings by way of appeal etc. sometimes result in an order disallowing a particular item of income as forming part of total income of A, and it may become necessary to include that item in the total income of B. This process also should not be regarded as subject to the period of limitation prescribed by section 34(3), since it is consequential on the order passed in the appeal etc. All that is necessary is a safeguard to the effect that the other person (B) should have been heard before the order was passed1.
1. S.C. Parashar v. Vasantasen Dwarkadas, (1956) 29 ITR 857 (Bom HC).
The Explanations in question are intended to clarify the position for such cases.
Explanation 3.- This is new and is intended to enable the Income-tax Officer to make an assessment at any time in the income of another person, whereby an order passed on appeal etc. such income is held to belong to that person. A safeguard has been provided to the effect that the provision will be applicable only where the other person against whom the assessment, is now proposed to be made, was given an opportunity of being heard before the basic order (that is, the order passed in appeal etc. on the basis of which the assessment is now sought to be made) was passed.