Report No. 12
62. Chapter XIV: Procedure for assessment.-
The provisions pertaining to procedure for assessment have been gathered together in this Chapter.
The Chapter has been divided into sections so as to bring out clearly and prominently the various stages of an assessment. The principal changes made by us in respect of these provisions are given below:-
(1) The date by which the voluntary return is to be filed has been fixed as the 30th day of June.1
(2) A primary obligation to make a return of income has been imposed3 without the necessity of a general notice as under the existing section 22(1).
(3) The provision has been extended to representative assessees, e.g., agents of non-residents, trustees2 and others.
(4) The person who is to sign the return is mentioned at present in a footnote to the form of return of income. We consider that this provision is so important that it should be embodied as a part of the Act itself. We have, accordingly, added a section on the subject.3 We have made special provisions for the signing of returns in the case of mentally incapacitated persons, minors and persons absent from India.
(5) The criteria for making a "best judgment assessment" have been specifically mentioned.4
(6) The provisions which are now contained in section 13 have been transferred to this Chapter. The provision has been so drafted5 as to avoid any conflict between sections 13 and 23. It has been made clear that section 13 applies only where the accounts are correct and complete. Section 23(4) will apply to cases where the accounts produced are not correct or are not complete.
(7) The Act-section 34(1), 1st Proviso, (ii) enables with the permission of the Central Board of Revenue, the reopening of assessments without limit of time in cases where the aggregate income which has escaped assessment is over Rs. 1,00,000. We consider that in most of the cases there should be some finality as to an assessment after the lapse of a certain period of time. While protecting the interests or revenue by providing6 that where income which has escaped assessment in a particular year is over Rs. 50,000 the proceedings can be re-opened without limit of time, we have provided7 for a limit of 16 years in all other cases which are now covered by section 34(1)(a) 1st proviso, clause (ii).
We would further recommend that even where the income escaping assessment in a particular year is over Rs. 50,000, there should be no re-opening of the assessment after the lapse of 16 years from the end of the assessment year concerned. This last recommendation has not been embodied in Appendix I.
(8) In the case of Parashar v. Vasantsen Dwarkadas, (1956) 29 ITR 857 (Bom HC) the Bombay High Court held that the provisions of section 34(3) are invalid to the extent, to which they allow the assessment of a person other than the assessee to be reopened without limit of time. We have now provided8 that the person whose alleged income is included in the assessment of the assessee, should be given an opportunity of being heard, before the assessment is completed. This will cure the invalidity of the provision.
(9) At present there is no time-limit for the completion of an assessment made under section 34(1)(a). We think that the proceedings for such assessments should not go on indefinitely. We have accordingly provided9 for a time-limit of four years for the completion of the assessment. The time limit will run from the end of the assessment year in which the notice under section 34 is issued.
Similarly, we have provided10 a time-limit of four years in a case where a notice is issued under section 28(3) read with section 28(1)(c) (i.e., notice for the imposition of a penalty where the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars). Under section 34(3) there is no time-limit for the completion of such assessments.
(10) Section 35 has been split into two sections. The rectification of mistakes, strictly so-called, is put in one section. Several rectifications which are permitted under section 35 are deemed to be mistakes apparent on the face of the record. All such deeming provisions have been gathered together in another section.
1. See clause 143(1), App I.
2. See clause 143(1), App I.
3. See clause 144, App I.
4. See clause 148, 149, App I.
5. See clause 150, App I.
6. See clause 155(1)(a)(i), App I.
7. See clause 155(1)(a)(ii), App I.
8. Vide clause 160, Expl. 3, App I.
9. Vide clause 160(2)(a), App I.
10. Clause 160(1)(b), App I.
63. Chapter XV: Liability in special cases.-
All the provisions of the Act dealing with liability in special cases have been gathered together in this Chapter.
The following topics have been dealt with in this Chapter:-
Representative assessees (i.e. persons liable as trustees, guardians,
managers, agents of non-resident etc.);
Succession and partition;
Shipping business of non-residents;
Persons leaving India;
Discontinuance of business etc., or dissolution of association;
Liability of State Governments.
64. The principal changes made in respect of these provisions are as under:-
(i) The provision relating to legal representatives has been made more elaborate1 so as to cover all possible situations.
(ii) A new expression has been coined,2 namely "representative assessee", to cover all cases where a person is made responsible in an assessment for the income of another person under sections 40, 41 or 42 (as trustee, guardian, Administrator-General, Court of Wards, receiver, agent of nonresident and otherwise). This scheme has been adopted from the South African Act.3 The adoption of this scheme has made for a considerable simplification in drafting.
(iii) A new provision4 has been inserted to make the representative assessee personally liable where he disposes of or parts with the assets in his possession after the tax has become payable.
Under the Act, a person liable as a representative assessee (particularly a guardian, trustee, or manager) can be assessed either under the special provisions applicable in such cases (sections 40, 41 and otherwise) or under the normal charging provision in section 3. We feel, however, that such persons should not be chargeable under section 3 when there are special provisions applicable to them. We have, accordingly, added a provision5 for the purpose.
The position regarding the rate of tax applicable to income received by a trustee in cases where the shares of the beneficiaries are unknown or where the income is not received on behalf of a particular beneficiary, has been slightly amended6 so as to provide that the tax on such income in the hands of the trustee and otherwise will be at the rate applicable to an association of persons; a provision has, however, been added to the effect that where the income is actually received by the beneficiary, the Income-tax Officer has the discretion to tax at the rate applicable to the beneficiary. We feel that the existing provision in section 41(1), 1st proviso, authorising the levy of tax at the maximum rate (in cases where the beneficiary has other income) is not fair. The sheer accident that a beneficiary has income from other sources, should not be a ground for taxing him at the maximum rate.
(iv) There is at present no provision in the Act for the assessment of executors. We have inserted a new provision7 for the assessment of executors, based on the corresponding provision of the Ceylon Act.
(v) The provisions of section 25A, it is now well-settled, apply only to cases of total partition of the family. There is no provision in the Act as to the enquiries to be made and the procedure to be adopted in the case of partial partition of a Hindu undivided family. We think that some provision on the subject is desirable. We have therefore amplified the section so as to cover cases of partial partition of Hindu undivided families.8
(vi) It has been made clear9 that the rate at which a State Government is to pay the tax on its tax free securities should be laid down by the Finance Act.
1. Vide clause 168, App I.
2. Vide clause 169-177, App I.
3. See sections 69-75, South African Income-tax Act, 1941.
4. Clause 172, App I.
5. Clause 170(3), App I.
6. Vide clause 174(a), App I.
7. Clause 178, App I.
8. See clause 181, App I.
9. Vide clause 188, App I.
65. Chapter XVI: Special provisions applicable to firms.-
All the provisions of the Act applicable to firms have been gathered together in this Chapter. This will enable the partners and others to ascertain the law from one Chapter instead of searching for provisions dispensed all over the Act
The principal changes made in this Chapter are given below:-
(1) The provisions contained at present in the Rules, regarding the registration and cancellation of registration of firms, have been incorporated in the Act.
(2) The provision for fresh application for registration every year has been deleted, as it entails hardship. A declaration that there has been no change in the constitution of the firm will suffice.1
(3) There was some difficulty in determining when there is a change in the Constitution of a firm and when there is a succession. The specific circumstances which result in a change in the constitution of a firm have now been defined.2
(4) It has been noticed that Income-tax Officers reject the applications for registration on the ground of technical defects in the instrument of partnership. For example, where the partners of firm A and firm B form a bigger firm-firm C, the registration of firm C is refused if the instrument of partnership of firm C does not itself specify the individual shares of the partners, but merely mentions the constituent firms as the partners. In such cases, the shares of the partners in firm C, we feel, should be ascertained with the help of the instruments of partnership relating to firms A and B. We have, therefore, proposed a change in section 26A, so that in considering the application for registration, the Income-tax Officer will be required to have regard to the instruments of partnership of the connected firms also.
(5) A clduse enumerating all other provisions relevant to firms has been added.
The provision for registration of firms (section 26A and the rules made thereunder) has worked great hardship in practice. Practical experience of the working of the Act shows that the department is astute to find technical defects on the strength of which registration may be refused. Such refusal can obviously work enormous hardship, since the result of such refusal would be that tax would be attracted at a much higher rate in most cases than if the income were apportioned among the various partners and taxed separately in their hands.
The reports of income-tax cases afford many illustrations of how even genuine firms have been refused registration merely because of some technical defect. We have tried to alleviate the hardship by liberalising the provisions to some extent, as indicated above. But we feel that if the provision for registration is at all to be retained there should be a complete change in the approach of the income-tax authorities, and the provision should not be administered in a hyper-technical spirit, as is done at present. If the law is not administered; in a liberal and reasonable spirit, the old adage "the letter killeth" would fully apply.
Double taxation of registered firms.-We would also like to draw the attention of the Government to another provision relating to firms which we feel is totally unjust. We are referring to section 23(5)(a)(i) of the Act, which provides for the levy of tax on registered firms in addition to the tax levied on the individual partners of registered firms. This is the least defensible provision of the present income-tax law. Prior to the amendments made by the Finance Act, 1956, a registered firm did not pay any tax itself, but each partner's share of the firm's profits was added to his other income and the tax payable by each partner on the basis of his total income (including his share of the firm's profits) was determined and the levy was made on the partners individually.
Thus, there was no double taxation. But after the amendment made by the Finance Act, 1956, (see paragraph D of the First Schedule to that Act for the rates of tax), income-tax is now assessable on a registered firm, and the partners of the registered firm are again liable to be charged in their individual assessments to both income-tax and super-tax in respect of their shares of the firm's profits. There is, thus, double taxation in the case of a registered firm so far as income-tax is concerned, (though rot as regards super-tax), and only partial relief against such double taxation is afforded by section 14(2)(aa).
This provision for double taxation is without precedent, so far as we have been able to gather, in the history of income-tax legislation, either in this country or in the other countries whose laws we have examined. To assess a firm in respect of its profits and to assess the individual partners again in respect of their shares of the firm's profits is virtually double assessment on the same individuals in respect of the same income. This type of legislation cannot be supported on any considerations of justice or fairness or any sound principle of taxation. It would work as a dangerous precedent.
We appreciate that it is a matter of legislative policy how high the incidence of taxation should be; but there is no reason why resort should be had to pure and simple double taxation on the same individuals, in respect of the same income under the same Act, as a mode of raising the revenue. As alteration in the tax structure is not within the scope of our proposals, we have not made any change on this point in the draft clause in Appendix I. But we strongly recommend that this provision [the system of taxing a registered firm under section 23(5)(a)(i) read with the annual Finance Act] should be abolished.
1. See clause 191(7), App I.
2. See clause 194, App I.
66. Chapter XVII: Special provisions applicable to companies.-
We felt that it would be useful to enumerate in one place all the provisions of the Act which pertain to companies. The provisions themselves have been put in the relevant places, e.g., residence has been put in the Chapter on 'Basis of charge', the additional super-tax payable by a company has been put in the Chapter on super-tax and so on. But all the provisions of the Act, which pertain to the assessment of companies have been listed here, for easy reference.
67. Chapter XVIII: Collection and recovery of tax.-
The provisions pertaining to collection and recovery of tax are contained at present in Chapters IV and VI. The provisions pertaining to deduction of tax, and advance payment of tax are really provisions pertaining to recovery of tax. Therefore, the provisions pertaining to deduction, advance payment of tax and recovery of tax have all been brought together in this Chapter.
68. The principal changes made in this Chapter are as under:-
(i) Some doubt was felt as to whether the provisions pertaining to deduction at source or advance payment of tax were valid in the absence of a charge of tax. We have made it clear by adding suitable provisions1 that there is a "charge" for deduction of tax, and advance payment of tax etc.
We have also made it clear2 that advance tax on dividends is confined to advance super-tax. So far as income-tax is concerned, the question of advance payment does not arise in view of the provisions of section 16(2) read with sections 18(5) and 49B.
We have also made changes3 in the rate of interest in connection with advance tax and the date from which the interest is to run, so as to secure uniformity. The notes on the relevant clauses indicates in detail the changes made in this respect.
(ii) In regard to the provisions for recovery of tax the principal change made is that the provisions pertaining to the procedure for recovery of tax by the Collector to whom a certificate is issued have been incorporated in a separate Schedule to the Act, which will constitute a self-contained Code. In drafting this Schedule, we have examined the provisions of the various Revenue Recovery Acts of the various States as also of the various Municipal Acts. The procedure to be followed by the Collector is not very clear and varies from State to State. This variance in procedure has been commented upon by the Supreme Court.4 Whatever the position may be in regard to recovery of tax levied by States, we consider that there should be a uniform procedure in regard to recovery of Central taxes. (See detailed discussions below under "Revenue Laws".)
(iii) Provision5 has been made for an Income-tax Officer to send a certificate to the Collector of any district in India in which the assessee possesses property or resides. At present, the Income-tax Officer can send a certificate only to the Collector of the district in which he functions, and where the certificate is to be sent to another Collector, the Collector to whom the certificate has been sent has to forward it to the other Collector. This procedure results in delaying proceedings for recovery.
(iv) It is the departmental practice and it is also convenient from the point of view of assessees-that the power to grant payments in instalments should rest with the Income-tax Officer, and that the power should continue even after the issue of a certificate to the Collector. We have inserted the necessary provisions on the subject.6
(v) The scope of sections 46 (3) and 46(4), under which, in areas notified by the Commissioner, arrears can be realised in the manner provided by the Municipal Act of the State, has been narrowed down. Of the various remedies provided by Municipal Acts, the power of distraint and sale is the only one that is really effective, and that has been specifically dealt with in the draft.7 It will be available to any Income-tax Officer authorised for the purpose by the Commissioner. The procedure to be adopted by the Income-tax Officer in the case of distraint of property has been dealt with in a separate Schedule.
Several Municipal Acts contain provisions for an application being made to a Magistrate having jurisdiction over the area and provide that the Magistrate will thereupon collect the tax in the manner provided for the recovery of fines or prosecute the defaulter for non-payment of the tax. These powers have in fact never been exercised, and we think it unnecessary to retain them.8
(vi) For expediting recovery, we think that it would be desirable to have a provision enabling the Income-tax Officer to apply directly to a court (in whose custody there is money belonging to the assessee) for payment of the money in its possession. This will save time, and do away with the necessity of proceeding through the Collector as at present. We have accordingly inserted a provision9 for the purpose.
(vii) One more mode of recovery is recovery by suit. This is implied under the present law, but we felt that it might be useful to make a specific mention of it in the Act, and have mentioned it accordingly.10
(viii) At present one of the modes of recovery is the imposition of a penalty under section 46 (1); the aggregate penalty imposed not exceeding the tax payable. The object of this provision is to prevent the assessee from utilising money which belongs to Government without compensating the Government by way of interest for the delayed payment. Under the present procedure, however, it may happen that while the penalty is imposed in one case where payment is delayed, it may not be imposted in another case where also payment is delayed.
It may also happen that in the case of a particular asssssee the penalty imposed under section 46 (1), is remitted on appeal. This, we consider, would lead to discrimination between assessees who are similarly situated, The provision in the Australia Act in this behalf has appealed to us as being more equitable. We have, therefore, provided11 for interest at 10 per cent being payable by every assessee who is in default in respect of the amount outstanding, from the date on which the amount falls due. (We think that the rate of interest should be sufficiently high so as to induce assessees to make prompt payment of arrears.)
We have also provided12 for the interest being waived in cases where the tax is paid within three months of the default.
The corresponding provisions in the Canadian, U.K. and Australian Acts may be compared .13
(ix) The position regarding the action to be taken for the correction or cancellation of a recovery certificate issued by the Income-tax Officer to the Collector is very uncertain at present. If after the issue of a certificate some mistake is detected or the amount is reduced or increased or the Income-tax Officer desires to withdraw the certificate for some reason, the action to be taken is not easily ascertainable from the Act. We have, therefore, added a provision14 to make the position clear. Under the provision proposed by us, the assessee cannot challenge the correctness of a certificate before the Collector; but he will have the right to move the Income-tax Officer (who issued the certificate) in appropriate cases. We have also provided for an appeal against an order of an Income-tax Officer rejecting an application of the assessee raising objection to the certificate.
(x) Regarding section 46 (5), which confers on the Income-tax Officer a power to require the employer of an assessee to withhold the assessee's salary and remit the amount to the Income-tax Officer towards payment of the assessee's arrears, we feel that the power should not be available in respect of that portion of the salary which is exempt from attachment under the Civil Procedure Code. We have changed the provision accord ingly.15
1. Vide clause 199(1) read with clause 3(2), App I.
2. Vide clause 215(3), App I.
3. See App I, clauses 221, Proviso and 224 for rate, and 223(1) for date.
4. Purshottam Govindji Halai v. Additional Collector of Bombay, (1955) 28 ITR 891.
5. See clause 232, App I.
6. See clause 229(2) and 234(1), App I.
7. See clause 235(5), App I.
8. Detailed discussion below under the head "Municipal laws" may be seen.
9. Vide clause 235(4), App I.
10. See clause 243(b), App I.
11. See clause 230(i), App I.
12. See clause 230(2), App I.
13. Cf. section 54, Canadian I.T. Act, 1948 (where the rate is 6 p.c.) and section 495, U.K.I.T. Act, 1952 (the rate being 9 p.c.) and section 270, Australian Income-tax Etc. Act, 1936-1953 (where the rate is 10 p.c.).
14. Clause 233, App I.
15. See clause 235(2), App I.
69. Revenue Laws.-
As regards recovery under revenue laws, a detailed discussion of the position appears to be desirable. Sub-section (2) of section 46 contains the procedure to be followed by the Collector after receipt of the certificate from the Income-tax Officer. The procedure is the same as that laid down for the recovery of arrears of land revenue in his State.
The proviso to sub-section (2) of section 46 confers upon the Collector all the powers which a court under the Code of Civil Procedure, 1908, exercises for the purpose of recovery of an amount due under a decree. This, of course, is without prejudice to any other powers of the Collector in that behalf.
[The provisions of sections 46 (3) and 46 (4) will be discussed later.]
70. The powers of the Collector are to be gathered from the laws relating to the realisation of land revenue obtaining in the appropriate State, supplemented by the powers exercisable under the Code of Civil Procedure. An examination of the revenue laws obtaining in the States now forming part of India shows that under these laws the following processes for realization of arrears of revenue are available.
(a) distraint and sale of moveable property of the defaulter;
(b) attachment and sale of immoveable property of the defaulter;
(c) attachment of property belonging to the defaulter and management thereof;
(d) arrest and detention of the defaulter in civil prison.
All these modes of recovery do not obtain in all the States. Further, in the same State, there are variations depending upon the place of accrual of the revenue arrears, according as the arrears arose in the capital city or outside.
71. Section 51 of the Code of Civil Procedure 1908, lays down the modes of execution and it contains as many as five methods of execution of a deCree of Civil Court. Sub-clauses (b), (c) and (d) of that section are alone relevant for the purpose of income-tax law, and they are:-
(i) attachment and sale, or sale without attachment of any property (the word property is here used so as to include moveable and immoveable property);
(ii) arrest and detention in prison; and
(iii) appointment of a receiver.
72. It will be seen by a comparison of the modes available under the revenue laws with those under the Civil Procedure Code that the only additional power which the Code of Civil Procedure confers is the power to appoint a receiver in execution of a decree. The Code of Civil Procedure lays down in Order XXI the procedure to be followed in respect of these modes. Revenue laws of the States also lay down the detailed procedure to be followed by the Collector for realising arrears of land revenue.