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Petitioner: N. NAGANATHA IYER VS Respondent: COMMISSIONER OF INCOME-TAX, MADRASHonorable Justice S. RAMACHANDRA IYERS. Swaminathan and K. Ramagopal,V. Balasubramaniam
1966 P T D 298
1966 P T D 298
[Madras (India)]
Before Ramachandra Iyer, C. J. and Srinivasan, J
N. NAGANATHA IYER
versus
COMMISSIONER OF INCOME‑TAX, MADRAS
Tax Case No. 148 of 1960/Reference No. 66 of 1960, decided on 18th September 1964.
Re‑assessment---‑Limitation‑Initiation of proceedings on the basis of appellate order‑Initiation of proceedings after 4 years validity‑Junior member of Hindu undivided family‑Whether party to decision against family‑Indian Income‑tax Act, 1922, S. 34 (3), second proviso‑Validity and scope.
A member of a Hindu undivided family must be deemed constructively to be a party to a decision to which the karta of the family is a party for the purposes of subsection (3) of section 34 relating to the limitation for initiation of proceedings under subsection (1) of that section against the member.
The share income from a firm was being returned by the member of a Hindu undivided family, who was a partner in a firm, as his individual income, and was being assessed as such. For the assessment year 1945‑46, the income‑tax department held that this income was the income of the Hindu undivided family and assessed it as income of the family. This decision was ultimately reversed by the High Court on December 12, 1955. As a precautionary measure the Income‑tax Officer assessed the income for the years 1945‑46 and 1946‑47 as the income of the member without prejudice to assessments on the family, but his decision was reversed on appeal and the income was assessed as income of the family. After the decision of the High Court in 1955, proceedings were commenced for reassessment of the member's income of 1945‑46 and 1947‑48 relying on the second proviso to section 34 (3). The assessee contended that the second proviso was ultra vires, inasmuch as it was discrimi natory in its operation, and that, therefore, the notices issued to the assessee under section 34 (1), having admittedly been done after the expiry of four years from the end of the concerned year of assessment, was invalid:
Held, (i) that the second proviso to section 34(3) was ultra vires only in so far as it applied to persons other than the actual assessee and those represented by him in whose appeal an appellate authority had given a finding or direction, which necessitated the subsequent reopening of the assessment;
(ii) the junior member must be deemed to be a constructive party to the decision of the High Court dated December 12, 1955; and
(iii) the proceedings against the member initiated after this decision under section 34 (1) would be saved from the bar of limitation with respect to the assessment of the member for the year 1945‑46, but the finding of the High Court cannot, however, be relied on as removing the bar of limitation in regard to the assessment for 1947‑48.
Prashar v. Vasantsen Dwarkadas (1963) 49 I T R (S C) 1 explained.
Income‑tax Officer v. Murlidhar Bhagwandas (1964) 52 I T R 335 (S C) fol.
Commissioner of Income‑tax v. Sardar Lakhmir Singh (1963) 49 1 T R (S C) 70 distinguished.
Narayanaswami Iyer v. Commissioner of Income‑tax (1956) 29 I T R 515 ref.
S. Swaminathan and K. Ramagopal for the Assessee.
V. Balasubramaniam for the Commissioner.
JUDGMENT
S. RAMACHANDRA IYER, J.‑This consolidated reference arises out of proceedings initiated by the Income‑tax Officer, Tiruchirapalli, under section 34 of the Indian Income‑tax Act, 1922, against one Naganatha Ayyar, with a view to bring to tax amounts in his hands, which had 'escaped assessment in the two assessment years 1945‑46 and 1947‑48, Naganatha, the assessee, was the junior member of a Hindu undivided family, the karta thereof being his father. Narayanaswami Ayyar. In February 1941, Naganatha, in partnership with one Manickam, commenced a business under the name of Andhra Trading Company. Manickam retired from the partnership on January 17, 1945, and thereafter Naganatha continued to be its sole proprietor. Both, he and the undivided family, of which he was a member, were assessee. So far as the income from the Andhra Trading Company was concerned, the Department at first accepted the position that Naganatha was exclusively entitled to the profits thereof. Accordingly, during the three assessment years preceding the year of assessment 1945‑46, assessments were made on him on that basis. For the year 1945‑46, Naganatha filed on July 19, 1946, his return disclosing the profits earned by him from the firm. But the Income‑tax Officer refused to accept such income as his separate property as he held that it was the family and not Naganatha that was the real partner in the Andhra Trading Company. As a consequence, the income from the firm was included in the income of the family, which was represented by the assessee's father. This finding as well as the assessment were affirmed by the appellate authorities. The matter was then taken up under section 66 to this Court, which gave the opinion that there was no material on record to sustain the conclusion of the Tribunal that it was the family and not Naganatha that was a partner in the firm. The opinion of this‑ Court was delivered on December 12, 1955, and is reported as Narayanaswami Iyer, v. Commissioner of Income‑tax ((1956) 29 I T R 515).
In the meanwhile, the assessee had filed his return in respect of the income from the Andhra Trading Company for the year 1947‑48. The department took no notice of this return and proceeded to assess the Hindu undivided family as before on that income as well.
But, even before the decision above referred to was given by this Court, the Income‑tax Officer issued notices under section 34 of the Act to Naganatha, calling upon him to file his returns for the three years commencing from 1945‑46. Although the assessee objected to the validity of the notices, the officer assessed him with respect to the income received from the business; this was undoubtedly a precautionary measure. It was expressly stated that the assessment was made without prejudice to the assessments on the family. The assessee appealed, and the Appellate Assistant Commissioner cancelled the assessments, observing that in case the High Court were to direct the exclusion of the income from the business in the hands of the assessee, the Income‑tax Officer could commence fresh proceedings under section 34.
That contingency, as we said, happened. Thereupon on February 13, 1957, the Income‑tax Officer issued notice under section 34 to bring to tax the income received from the Andhra Trading Company in the hands of Naganatha, as by reason of the decision of the High Court in the assessment proceedings relating to the Hindu undivided family, it was the assessee, Naganatha, who received the said income and not the joint family. Objection was then taken to the proceedings on the ground that they were initiated beyond the period of four years prescribed by section 34. The Department overruled the objection relying upon the second proviso to section 34 (3). This view was affirmed, on appeal, by the Appellate Tribunal which, however, referred the following question for our opinion under section 66 (1).
"Whether the aforesaid assessments on the assessee, dated October 29, 1957, and November 7, 1957, for the assessment years 1945‑46 and 1947‑48 respectively are valid in law?"
It is not disputed that if the second proviso to section 34 (3) is valid, the assessments in the present case could not be impugned. But learned counsel for the assessee has contended that the second proviso is ultra vires, inasmuch as it is discrimi natory in its operation and that, therefore, the notices issued to the assessee under section 34 (1), having admittedly been done after the expiry of four years from the end of the concerned year of assessment, must ‑be regarded as invalid. The question of vires of the second proviso to section 34 (3) was considered in detail by the Supreme Court in Prashar v. Vasantsen Dwarkadas ((1963) 49 I T R 1 (S C)). In the judgment delivered by us in T. C. Nos. 156 and 157 of 1960, Muthukaruppan Chettiar v. Commissioner of Income‑tax ((1965) 56 I T R 674), we had occasion to consider the effect of that pronouncement. We have held that as a result of the decision of the Supreme Court, the second proviso to section 34 (3), will have to be struck down only in so far as it applied to persons other than the actual assessee and those represented by him in whose appeal the appellate authority had given a finding or direction, which necessitated the subsequent reopening of the assessment.
This point indeed follows, even apart from the constitutional aspect of the question, from the later decision of the Supreme Court in Income‑tax Officer v. Murlidhar Bhagwan Das ((1964) 52 I T R 335 (S C)) where Subba Rao J., construing the expression "any person" in the second proviso, held that it would bring within its scope only the concerned assessee and those lawfully represented by him.
In Commissioner of Income‑tax v. Sardar Lakhmir Singh ((1963) 49 I T R 70 (S C)), the Supreme Court had before them a case where a Hindu undivided family was sought to be assessed. In proceedings relating to the assessment of the family here the appellate authority found that the family did exist, as there had been a partition even prior to the year during which the profits were earned. As a result of that finding, proceedings under section 34 were initiated, beyond the period prescribed by that section, against a junior member of the family, who was not eo nomine a party to the appeal. The Supreme Court held that the second proviso to section 34 (3), on which reliance was placed to sustain the reassessment, could not validly operate against him, inasmuch as he was only a third party so far as the previous proceedings were concerned.
That was a case in which the father, who was sought to be assessed as the karta of the family, could not represent the junior member as a partition had already taken place.
The case before us is different; here, admittedly a joint family exists, and the father, Narayanaswami Iyer, can represent his son, Naganatha, in all matters concerning the affairs of the family. The latter, in such proceedings against the father, can be deemed as being, constructively, a party thereto. Therefore, the conclusion reached by this Court in Narayanaswami lyer v. Commissioner of Income‑tax ((1956) 29 I T R 515) must be deemed to have been reached in the presence of Naganatha as well. The inclusion of the income from the Andhra Trading Company in the assessment of the family would certainly affect his interest in the family, for the family will have to pay the tax. The non‑inclusion of such income in the income of the family would benefit him qua such member. Naganatha being thus constructively a party to the previous decision of this Court, the finding given in that decision can be taken advantage of by the Department for the purpose of initiating proceedings under section 34 against him. To this extent the second proviso to section 34 (3) should be regarded as valid.
In Income‑tax Officer v. Murlidhar Bhagwan Das, the Supreme Court laid down that a finding or direction given by the appellate or revisional authorities or the High Court under section 66 (1) would avail the Department for invoking the second proviso to section 34 (3) only for the year of assessment, with which proceedings, such authority or High Court was concerned. In the present case, what gave rise to the reference, which was answered in Narayanaswami Iyer v. Commissioner of Income‑tax, was the assessment of the Hindu joint family represented by Naganatha's father for the year 1945‑46. Therefore, the proceedings subsequently initiated under section 34 (1) would be saved from the bar of limitation only with respect to the assessment of Naganatha for the aforesaid year, namely, 1945‑46; such a finding cannot however be relied on as removing the bar of limitation in regard to .the assessment
We are, therefore, of opinion that the question referred to us should be answered in the following manner. The assessment of the assessee dated October 29, 1957, for the year 1945‑46 will be valid but the assessment on the assessee dated November 7, 1957, for the year 1947‑48 will be invalid. There will be no order as to costs.