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Petitioner: LAXMIDAS & Co. VS Respondent: COMMISSIONER OF INCOME-TAX, BOMBAY
Court Name: Bombay High Court Judge(s): V. S. Desai, S. P. Kotwal Title: LAXMIDAS & Co. vs COMMISSIONER OF INCOME-TAX, BOMBAY Case No.: Income-tax Reference No. 50 of 1962 Date of Judgment:1968-11-14 Reported As: 1971 PTD 579 Result: answered in the affirmative
JUDGMENT
JUDGMENT V. S. DESAI, J.-This reference arises out of the reassess--ment made upon the assessee-firm for the assessm ent year 1948-49, the previous year for which was the S. Y. 2003 from 25th October 1946, to the 12th November 1947. At the material time the assessee was a partnership firm consisting of three equal partners. One of the partners died subsequently in S. Y. 2005 and the firm was dissolved on his death. The original assessm ent was completed by the Income--tax Officer on the 24th April 1950, which was after the dissolution of the firm. The total income was determined at Rs.3,600. The application under section 26-A made by the assessee was granted and its registration was renewed for the assessment year in question. Subsequently, the Income-tax Officer received information that the assessee-firm had received a sum of Rs. 1,75,000 by telegraphic transfer from Nandlal Bhandari Mills Ltd., Indore, on the 3rd June 1947. The preliminary enquiry made by the income-tax Officer on receipt of this information showed that the said amount represented a part of the total sale proceeds of Rs. 1,76,444 in respect of 826 bales of cotton sold by the assessee-- firm to the Nandlal Bhandari Mills Ltd., and R.I Bahadur Kanhaiyalal Bhandari Mills Ltd., Indore. In the assessee's account books, which had been produced before the Income-tax Officer at the time of the original assessment, there was an account in the name of one Hastimal Parikh. A credit entry was made in the said account in respect of the said sum of Rs. 1,75,000 received by telegraphic transfer and an equal amount was shown as having been paid to him in cash in Bombay. In view of these facts the Income-tax Officer was of the opinion that there was a case for reopening the assessment under clause (a) of section 34(1). He accordingly issued a notice to the assessee-firm and served it on one of its partners on
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the 23rd March 1957. In response to the said notice a return was submitted on behalf of the assessee-firm on the 24th April 1957, and the reassessment was completed on the 18th March 1958, The reassessm ent order was served on the assessee on the 25th March 1958. On the material, which was before him, the Income-tax Officer came to the conclusion that the transaction of the sale of 826 bales of cotton was the assessee's transaction and the amount of Rs. 1,75,000, which was received by the assessee by telegraphic transfer, constituted its own receipt, and since the cost of the 826 bales had not come out of the account books of the assessee, the cost as well as the profits on the transaction constituted the secret profits of the assessee. In the view of the Income-tax Officer the element of profit involved in this trans--action was the assessee's profit on the transaction received by it in the account year and consequently taxable under section 4(1)(a) and the part, which represented the cost of the 926 bales, was the accumulated profits of the assessee of earlier years outside the taxable territories, which it had received or brought into the taxable territories during the year of account and, therefore, taxable under section 4(1)(b)(iii) of the Act. The Income-tax Officer, therefore, brought the entire amount of Rs. 1,75,000 to tax. The assessee appealed to the Appellate Assistant Commis--sioner. Several contentions were raised by it before him. It was contended that the notice of reassessment, which was issued in the name of the dissolved firms, was bad and inoperative in law and, consequently, the reassessment made in consequence of the said notice was also bad and invalid; that the reassessment had not been completed within a period of one year from the date of the service of the notice and was, consequently, illegal in view of the proviso to section 34(3) as it stood at the material time. On merits, it was contended that the Income-tax Officer had erred in holding that the transaction of the sale of 826 bales of cotton was not a transaction of Hastimal as alleged by the assessee but of the assessee itself. It was urged that the assessee had duly discharged the burden, which lay on it to prove the source of the receipt of Rs. 1,75,000, and the Income-tax Officer had erred in treating the item as the secreted profits of the assessee. The Appellate Assistant Commissioner did not accept any of the contention urged by the assessee. He agreed with the view taken by the Income- tax Officer that the assessee was the undoubted owner of the 826 bales of cotton, which were sold by it to the two textile mills at Indore. The amount of Rs. 1,75,000 which it had received from the Nandlal Bhandari Mills by telegraphic transfer was, therefore, a receipt of the assessee itself and the entire receipt, according to the Appellate Assistant Com--missioner, was chargeable in accordance with the provisions of section 4(1) of the Income-tax Act. The Appellate Assistant Commissioner accordingly dismissed the assessee's appeal. The assessee took a second appeal to the Income-tax Appellate Tribunal. All the contentions which were urged before the Appellate Assistant Commissioner, were repeated before the Tribunal. In addition, it was urged before the Tribunal that the action under section 34(1)(a) was not validly instituted because all the primary facts were before the Income-tax Officer when he made the original assessment and, as such, he was not competent to take recourse to section 34(1)(a) of the Act. It was further complained that the Appellate Assistant Commissioner had relied on certain additional evidence which had been secured behind the back of the assessee while the appeal was pending and the assessee had no opportunity to meet it. The Tribunal did not accept any of the contentions of the assessee except the one, which it had made relating to the consideration of additional material by the Appellate Assistant Commissioner. With regard to the said contention the Tribunal held that the Appellate Assistant Com--missioner was not entitled to consider the said part of the evidence and that it had to be left out from consideration. It was, however, of the opinion that, even without taking into consideration the said additional material, there was enough evidence on record to justify the conclusion which the Income--tax Officer and the Appellate Assistant Commissioner had come to, with regard to the merits of the matter. According to the Tribunal the view taken by the departmental authorities that the transaction of 826 bales of cotton was made in fact by the
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assessee itself and that Shri Hastimal had nothing to do with the sale or the sale proceeds was correct. The Tribunal was of the opinion that, since the assessee's books of account did not show the funds from which the said bales of cotton were purchased, it was legitimate to infer that the said funds came from some undis--closed source and the entire amount of Rs. 1,75,000, which consisted of the sum invested in the purchase of 826 bales of cotton, and the element of profit involved in the said transaction constituted the undisclosed income of the assessee. Since the assessee had offered no explanation with regard to the said receipt, which could be believed, the entire amount constituted the assessee's undisclosed income liable to be brought to tax. It may be, observed the Tribunal, that the sale transaction might have involved some expenses and, consequently, the amount of Rs. 1,75,000 received by the assessee could be treated as a gross receipt of the sale. Since, however, no satisfactory explanation had been given by the assessee with regard to the part that could be deducted by way of expenses, the whole of it had to be treated as the income of the assessee. The Tribunal accordingly confirmed the decision of the departmental authorities and dismissed the assessee's appeal. The assessee applied to the Tribunal under section 66(1) for a reference to this Court on a number of questions. On the said application the Tribunal held that only two of the several questions, which had been suggested by the assessee, could be regarded as questions of law arising out of its order. It accordingly drew up a statement of the case and referred to this Court the two questions, which were as follows: "(1) Whether the assessm ent made upon the assessee-firm, Laxmidas & Co., on the basis of the notice issued under the name of the firm, and served upon Chatrabhuj Vithaldas on March 23, 1957, was valid in law, the validity being challenged on the ground that the firm ceased to exist at the material time of service of notice under section 34? (2) Whether the reassessm ent made upon the assessee on March 18, 1958, was barred by limitation of one year mentioned in the first proviso to section 34(3)?" When the reference came to this Court, a notice motion was taken out by the assessee praying that the Tribunal should be asked to furnish a supplementary statement on certain other questions of law which arose out of the Tribunal's order and which it had declined to refer. That notice of motion was heard by us on the 27th February 1967. There were in all four questions asked by the assessee in the said notice of motion. Two of them, however, were not pressed. Of the other two, one was: "Whether there was any evidence in support of the conclusion arrived at by the Tribunal that the said sum of Rs. 1,75,000 represented the undisclosed income of the assessee?" and the other was: "Whether the whole sum of Rs. 1,75,000 or only apart thereof which represented the estimated profits of the assessee on the sale of the 826 bales of cotton could be said to be the assessee's income?" It was complained by Mr. Kolah, counsel for the assessee, that the conclusion of the Tribunal that the amount of Rs. 1,75,000 represented the income of the assessee from undis--closed sources during the material year of account was nothing but a mere surmise since there was nothing to be found in the Tribunal's order with regard to the said conclusion. It was also complained by him that the Tribunal had failed to consider the question as to what part of the amount was capable of being allowed to the assessee as the expenses of the transaction. It was urged by him that the Tribunal had erred in proceeding on a different basis from that adopted by the departmental authorities even without giving him an opportunity to put before the Tribunal what he could have said about the new basis adopted by it. In view of the submissions urged before us by Mr. Kolah which, we were of opinion, were not without substance, we directed the Tribunal to furnish a
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supplementary statement of the case raising two other questions, which were sought by the assessee. Those questions were as follows: "(1) Whether there was any evidence in support of the conclusion arrived at by the Tribunal that the said sum of Rs. 1,75,000 represented the undisclosed income of the applicants? (2) Whether there is -any evidence in support of the conclusion that the whole of the said sum of Rs. 1,75,000 representing the sale proceeds of 825 bales of cotton sold and delivered to the mills at Indore, represents income of the appellant (or whether only a part thereof, representing the estimated profits of the applicants on the sale thereof, can be said to be the applicant's income?" The Tribunal accordingly has drawn up a supplementary statement and referred the said two questions to us. Now, when the matter went back to the Tribunal for drawing up the supplementary statement, it was urged on behalf of the assessee that it should be allowed to put before the Tribunal evidence regarding the actual profits that the assessee could have made on the transaction of the sale of 826 bales of cotton and desired to produce the material part of the Bombay Cotton Annual 1946- 47, No. 28, where the review of the season of the year 1946-47 was given and where also the rates of the deliveries were mentioned. This Annual, according to Mr. Kolah, would show the prevailing prices of Jarilla cotton during the material period and from the said prices the cost of the 826 bales of cotton to the assessee could be estimated. In view of the decision of the Supreme Court in Keshav Mills Co. Ltd. v. Commissioner of Income-tax ((1965) 56 I T R 365 (SC)), the Tribunal was reluctant to take the additional evidence on record at the stage of making a supplementary statement. It was, however, urged before it that, in view of the observations contained in the judgment of this Court on the notice of motion, it was intended by the High Court that the Tribunal should give an opportunity to the assessee to put before it material which might be relevant to be considered in connection with the basis which the Tribunal had adopted against it. In view of the said submission, the Tribunal took the view that, although there were no specific directions in the order of the High Court directing it to bring fresh evidence on record, reading the order of the High Court as a whole, it could be said that the High Court had intended that an opportunity should be given to the assessee to put additional material. It, therefore, took the Bombay Cotton Annual 1946- 47, No. 28, which had been produced by the assessee, on the record and made it a part of the statement of the case marking it as Annexure "G". A notice of motion has been taken out by the Department praying that the supplementary statement should be sent back to the Tribunal with a direction to resubmit the same to the High Court after deleting the reference to the Bombay Cotton Annual, No. 28, in its statement. We will dispose of the notice of motion before proceeding to deal with the reference. It is urged by Mr. Joshi on behalf of the Commissioner that, in view of the Supreme Court in Keshav Mills Co. Ltd. v. Commissioner of Income-tax, it is now clear beyond doubt that no additional evidence can be directed to be taken at the time of drawing up a supplementary statement of the case. Mr. Joshi argues that, in view of the said decision, this Court could not have asked for additional evidence to be taken, nor has it, in the order made by it on the notice of motion, given any such directions. The Tribunal, according to Mr. Joshi, therefore, has erred in allowing the additional evidence to be produced on the record at the state when it was asked to draw up a supplementary statement of the case. We are in agreement with the submission urged by Mr. Joshi. The supplementary statement was asked for on the two questions, which, is our opinion; arose on the order of the Tribunal and, since they had not been referred to in the original reference made by the Tribunal, we asked them to be drawn up and submitted to us along with the supplementary statement of the case in respect of the same. It is, no doubt, true that in the order that we made on the notice of motion in giving reasons why we felt that the questions arose on the order of the Tribunal, we referred to the
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submissions urged by Mr. Kolah relating to the same. We also observed that the submissions, which Mr. Kolah had made before us, were not without substance. But those submissions were referred to by us for the purpose of showing that the Tribunal should have referred the two questions to us. The questions, in our opinion, arose on the Tribunal's order and we, therefore, required them to be submitted to us. The questions had to be referred to us on the order of the Tribunal as it stood and it was never intended by us that, for the purpose of referring the said questions to us, the Tribunal should consider them itself afresh on the basis of further evidence allowed to be led by either party. Mr. Kolah, for the assessee, has pointed out that there was no purpose whatsoever in his asking for the question No. 2 unless he was to be allowed an opportunity to produce the material, which would help in deter--mining the cost of the cotton bales. Since the High Court had agreed to his request that the said question should be asked to be referred by the Tribunal, it was implicit that the material for the determination of the said question should be allowed to be brought on record by it. We cannot agree with this submission of Mr. Kolah. Prima facie, on his submission, the question arose and if he wanted it to be referred, he would, in our opinion, be entitled to have it. How the question would be answered would be determined when the question is referred and dealt with by us. The circumstance that there was no adequate material on record, which would supply a proper and adequate answer to the question, did not at that stage permit us to ask the Tribunal to collect further material and supply the same along with the question. In our opinion, therefore, the Bombay Cotton Annual, which has been wrongly taken on record by the Tribunal and the reference to its contents in its supplementary statement, will, therefore, have to be deleted. The notice of motion taken out by the Department has prayed that the supplementary statement should be sent back for having deleted there from the reference to the Bombay Cotton Annual contained in paras. 9 and 10 of the supplementary statement. Instead of sending the reference back for that purpose, which will involve some further delay in disposing of this refer--ence, which is of 1962, we will treat the said reference to the Bombay Cotton Annual in the supplementary statement as deleted and leave it out of consideration. As to question No. 1 referred to us on the original reference, vie. Whether the assessment made upon the assessee-firm on the basis of the notice issued in the name of the firm after its dissolution and served on one of its partners was valid in law, it is covered by a decision of this Court in Commissioner of Income--tax v. Devidayal & Sons ((1968) 68 I T R 425), which follows the Supreme Court decision in C. A. Abraham v. Income-tax Officer, Kottayam ((1961) 41 I T R 425), relied on by the Tribunal. It was held in the said case that, even after the discontinuance of the business of a firm, either by dissolution or otherwise, the firm can be treated as continuing so far as the assessm ent of its pre-dissolution income is concerned, and the assessment or reassessment of such a firm, after dissolution, under section 44 of the Indian Income-tax Act, could be made in the same manner under Chapter IV as if it had not discontinued its business. It was also held that the service of notice issued in the name of the firm and served on one of the partners was also a valid and proper notice. In view of the said decision which completely covers the first question. Mr. Kolah, learned counsel for the assessee, has agreed that no useful purpose will be served by re-agitating it before this Court. The first question, therefore, will have to be answered against the assessee. As to the second question raised on the original reference, viz. Whether the reassessment made upon the assessee on the 18th March 1958, was barred by limitation of one year mentioned in the first proviso to section 34(3), the relevant dates to be mentioned are these: Notice of reassessment was issued on the 20th March 1957, and served on the assessee on the 23rd March 1957. The assessm ent was completed on the 18th March 1958, and the assessment order, which was served on the assessee by registered post, was received by it on the 25th March 1958. Under section 34(3), before its amendment by the Finance Act of 1956, the order of assessment or reassessment in
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cases falling within clause (a) of subsection (1) of section 34 had to be made within eight years from the end of the year in which the income, profits and gains were first assessable. The proviso to the said subsection provides as follows: "Provided that where a notice under subsection (1) has been issued within the time therein limited, the assessm ent or reassessm ent to be made in pursuance of such notice may be made before the expiry of one year from the date of the service of the notice even if such period exceeds the period of eight years . . . . ." The contention of the assessee is that, since the notice under section 34(1)(a) had been issued within the time prescribed by sec--petition 34(3) but the assessment was made after the expiry of the said period, the proviso applied to the case and, since the assess--ment had not been made within the period of one year specified in the proviso, it was incompetent and invalid. Now, in the present case, the notice was served on the 23rd March 1957, and the Income-tax Officer made the assessm ent order on the 18th March 1958. It would, therefore, be seen prima facie that the order was made within the time-limit specified in the proviso. The order, however was served on the assessee on the 25th March 1958, which was beyond the period of one year from the date of service of the notice by two days. The argument of the assessee was that the reassessment could not be said to be made by the Income-tax Officer until the assessment order was communicated to, or served on, the assessee and, therefore, in the present case, the assessment could be only taken to have been made on the 25th March 1958, and not on the 18th March 1958, when the Income-tax Officer had merely completed the assessment. In support of this argument reliance was placed on behalf of the assessee on the decision of this Court in Petlad Bulakhidas Mills Co. Ltd. v. Raj Singh ((1959) 37 I T R 264), in which the expression "one year from the date of the order" occurring in section 33-A(2) was interpreted by this Court, as meaning one year from the date on which the assessee actually knew of the order or had an opportunity of knowing of the order. The provisions of section 33-A(2) provided a period of limitation for an application for revision to be made by the assessee against an order passed by any authority subordinate to the Commissioner and the said period was specified as one year from the date of the order which was sought to be revised. In the context of the provision it was held by this Court that the right to make an application in revision was given to the assessee against an order and the right can only be effectively exercised if the party affected had the knowledge, either actual or constructive, of the order. If the assessee had neither actual nor constructive knowledge, it could not be said that there was an order under section 33-A(2) against which the assessee could possibly make an application for revision. There are, however, a number of authorities on the interpretation of the expression contained in section 34(3) itself, which have taken the view that the period of time specified in the said proviso is the time up to the date of the communication of the said order or the service thereof on the assessee. In R.M. P. R. Viswanathan Chettiar v. Commissioner of Income- tax ((1954) 25 5 I T R 79), the Madras High Court held as follows: "The time-limit of four years which subsection (2) of sec--petition 34 (as it then stood) provides is the period within which the Income-tax Officer has to complete one stage of the pro--ceedings, that is, the assessm ent of the income and the deter--mination of the tax payable. That stage can be completed by the Income-tax Officer himself within that period and it is not necessary that the terms of the order of assessm ent should be communicated to the assessee within that period." It may be pointed out that in that case the decision in Muthiah Chettiar v. Commissioner of Income-tax ((1951) 19 I T R 402) in which the Madras High Court had interpreted the expression "date of the order made" in section 33-A(2) in the same manner as done by the Bombay High Court in Petlad Bulakhidas Mills Co. Ltd. v. Raj Singh, relied on by Mr. Kolah, had been pressed into service on behalf of the assessee. The case was distinguished and it was pointed out that the expression, as a statutory expression, had to be construed with reference to the context in which it
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had been used in the statute and the interpretation put on the words "order made" in section 33- A(2) was in the context of the provision of that statute which was entirely different from the context of section 34(2). It may be pointed out that the decision of this Court in Petlud Bulakhidas Mills Co. Ltd. v. Raj Singh followed the Madras decision in Muthiah Chettiar v. Commis--sioner of Income-tax. In Kodidasu Appalaswa my and Suryanaryana v. Commissioner of Income-tax ((1962) 46 I T R 735), the Andhra Pradesh High Court has taken the same view and held as follows; "If an order of reassessm ent is made within the period of 4 years from the end of the year in…
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