1962-VIL-131-MAD-DT

Equivalent Citation: [1964] 52 ITR 890

MADRAS HIGH COURT

Tax Case No. 135 of 1960

Dated:25.09.1962

K.E.M. MOHAMMAD IBRAHIM MARACAIR AND ANOTHER

Vs

COMMISSIONER OF INCOME-TAX, MADRAS

For the Assessee: R. Kesava Ayyangar

For the Commissioner: S. Ranganathan

Bench

Jagadisan And Srinivasan, JJ.

JUDGMENT

Srinivasan, J.

Mohammad Ibrahim Maracair and Mohammad Abdulla Maracair were partners in the firm of Mohammad Abdulla Maracair and Co., Panruti. Ibrahim Maracair submitted his returns for the assessment years 1947-48 to 1954-55 and was duly assessed. Likewise, Abdulla Maracair made his returns for the assessment years 1948-49 to 1954-55. The assessment of the incomes of these two persons during the relevant assessment years covered their partnership income in the above-said firm. The assessments were made in the status of resident and ordinarily resident.

In the course of the assessment proceedings for the assessment year 1956-57, the Income-tax Officer became aware that these assessees were non-residents and that they had income outside the taxable territories which if taken into account under the relevant provisions of the Indian Income- tax Act, would attract tax at a rate higher than that at which they had been assessed. Accordingly, he reopened the assessments of these two assessees for the said years and issued notices to them under section 34 of the Act. In the returns filed by the assessees in response to these notices, they declared their status as non-residents and furnished their incomes as they appeared in the original returns made by them. They objected to the proceedings under section 34 of the Act as illegal. The Income-tax Officer, however, assessed them to tax at the rates applicable to non-residents but on the income that arose or accrued in the taxable territories. Against these assessments, appeals were taken to the Appellate Assistant Commissioner, it being contended that section 34 of the Act did not authorise the assessment at the maximum rate, that the notices were invalid inasmuch as they did not contain the necessary particulars required to be stated therein and further that the provision of the Indian Income-tax Act imposing the liability to tax on a non-resident at the maximum rate was unconstitutional as offending article 14 of the Constitution of India. These contentions were overruled. One other contention that was raised was that in the case of Mohammad Ibrahim, there had been an earlier proceeding under section 34 of the Act in respect of the assessment years 1949-50 to 1951-52 and that the statute did not authorise a second proceeding under section 34. This contention was also rejected.

A further appeal to the Tribunal also failed, the assessees being unable to convince the Tribunal of the sustainability of any of these above contentions.

Under section 66(1) of the Act, the assessees moved the Tribunal to refer certain questions of law for the consideration of this court, and the questions of law so referred are:

"(1) Whether the provision of the Income-tax Act for the levy of maximum rate is not a denial of equality before the law within the meaning of article 14 of the Constitution of India and void under article 13 and the present assessment as a non-resident at the maximum rate is not, therefore, void?

(2) Whether the aforesaid reassessments under section 34 for all the assessment years 1947-48 to 1954-55 in the case of Mohammad Ibrahim and assessment years 1948-49 to 1954-55 in the case of Mohammad Abdulla are valid?"

We shall deal with the second question first. One of the grounds urged on behalf of the assessees is that the notice did not comply with the requirements of the section and furnished no information to the assessees of the particular reasons which led to the reopening of the assessments. It is claimed that the assessees were not put on notice on the basis of the re- opening and that, therefore, the notice is bad in law and the proceedings stand vitiated. What is contended in this regard is that in the copy of the notice issued by the Income-tax Officer, the Income-tax Officer stated that he had reason to believe that the assessees' income assessable to income-tax for the relevant assessment year had (a) escaped assessment, (b) been underassessed, (c) been assessed at too low a rate, (d) been subject to excessive relief and (e) been the subject of computation of the excessive loss or depreciation allowance. He continued in the notice, "I, therefore, propose to reassess the said income less depreciation that has (a) escaped assessment; (b)...........etc.," and called upon the assessee to "deliver to me not later than or within 35 days of the receipt of the notice a return in the attached form of your total income and total world income assessable for the assessment years 1948-49". He also indicated that the notice was issued after "obtaining the necessary satisfaction" of the Commissioner of Income-tax, Madras. It will be noticed that all the clauses (a) to (e) referred to above cover the several aspects dealt with in section 34 of the Act by reason of which the Income-tax Officer is enabled to take proceedings under the provision for reassessing the income and the tax. In the present case, however, the contention of the department was that since the assessee is a non-resident having income outside the taxable territories also, he is liable to be taxed at the maximum rate or at a rate dependent upon his total world income under section 17 of the Act. If the assessee fails to furnish his total world income to enable the tax to be levied on the basis of a rate dependent upon such total world income, the Income-tax Officer is authorised to levy the tax at the maximum rate as provided by section 17 of the Indian Income-tax Act. Since the assessees had failed to disclose their status as non-residents, but had in their original returns indicated that they were residents of Panruti and failed also to furnish particulars of their incomes derived outside the taxable territories the tax had been levied at a rate relevant to the income disclosed in those returns, income that accrued or arose within the taxable territories only. Obviously, the rate was too low a rate within the meaning of section 34 of the Act and it was on this basis that the proceedings were launched by the Income-tax Officer. Mr. Kesava Ayyangar for the assessees contends that the Income-tax Officer was bound to disclose in the notice issued by him the particular reason for the reopening of the assessments and whether the case requiring action fell with one or the other of the heads referred to. In the notice, however, beyond indicating that it was a notice under section 34 of the Indian Income-tax Act, nothing express was stated which would inform the assessees of the case that he had to meet. It is contended that section 34 requires that that should be done, and if that is not done, the notice is not a proper notice and the proceedings stand wholly invalidated.

A perusal of the section, however, does not support this contention. The relevant requirements in so far as they are material to the present case are that the Income-tax Officer should have reason to believe that by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year, the income, profits or gains chargeable to income-tax had escaped assessment for that year, or been under-assessed, or been assessed at too low a rate. If he has such reason, he is required to serve on the assessee a notice containing all or any of the requirements which may be included in a notice under sub- section (2) of section 22. It is clear, therefore, that when the Income-tax Officer honestly believes that the income, profits or gains have been assessed at too low a rate by reason of the failure of the assessee to disclose all material facts necessary for his assessment, the only notice that he is called upon to issue to the assessee is a notice of the description referred to in section 22, sub-section (2). It does not even appear from the section that the Income-tax Officer should expressly state it to be a notice under section 34 of the Act. If it is a case where the assessee had already been assessed for a particular year, a subsequent notice issued calling upon him to comply with the requirements of section 22, sub-section (2), would clearly indicate to the assessee that it was a case of reopening of the assessment. Even otherwise, if the assessee had not submitted his return and the assessment year had elapsed, even a notice issued for the first time by the Income-tax Officer under section 22(2) is one which comes within the scope of section 34, for it would be a case where there had been a failure of the assessee to make a return of his income, and the income, profits or gains chargeable to income-tax had escaped assessment for that year. What all the section, therefore, requires is that the notice should indicate that it is a proceeding under section 34 of the Act, which to the knowledge of the assessee it would be, had there been an earlier assessment for that assessment year. It may also be specifically noticed that the requirements of a notice purporting to be the precursor of the reopening of the assessment is not in any way different from the requirements of a notice required to be issued under section 22(2) of the Act. In this provision, the notices which the Income-tax Officer is called upon to issue is to demand "a return, in the prescribed form and verified in the prescribed manner, setting forth (along with such other particulars as may be provided in the notice), his total income and total world income during the previous year". It follows, therefore, that a notice leading to the reopening of the assessment under section 34 is not any special kind of notice which requires any information to be furnished to the assessee as to the reasons for reopening. It may also be noticed that neither the Act nor the Rules provide for any special form of notice under section 34. That is as it should be, because, the section itself indicates the kind of notice that has to be issued to the assessee and that, as we have seen, is nothing more than a notice conformably to the requirements of section 22, sub-section (2).

We are not satisfied also that beyond the fact that the Income-tax Officer purports to exercise his jurisdiction under section 34 of the Act and to reopen the assessment, it is necessary for the Income-tax Officer to inform the assessee of the particular reasons leading to the reopening of the assessment. It would suffice in our opinion if the notice merely stated that the Income-tax Officer believed that the case of the assessee required reopening of the assessment under section 34 of the Act and to indicate that he had complied with the requirements of the provision by obtaining the prior approval of the Commissioner of Income-tax and in terms of the section called upon the assessee to submit a return containing such particulars as section 22, sub-section (2) requires. The conditions for reopening of the assessment are not the same as the contents of the notice to be issued to the assessee. The conditions requisite are merely that the Income-tax Officer should have reason to believe that one or the other of the grounds necessitating the revision of the assessment existed in the case. Which precise grounds operated on his mind and what reasons impelled him to come to that conclusion are not required to be intimated to the assessee. The reason is obvious. It may be that when the Income-tax Officer commences the proceedings under section 34, he might have had reason to believe that a particular item of income had escaped to be included in the assessable income of the assessee. But having started the proceeding under section 34, the Income-tax Officer is not, under the terms of the section, as it stands, confined only to that particular item. It may transpire in the course of the proceedings that excessive relief had been given to the assessee and it would be open to the Income-tax Officer to deal with that aspect of the matter also. The intendment behind the section is that the whole of the assessment is thrown open and even if the Income-tax Officer's notice contained only one particular head for reopening the assessment, he is not incompetent to deal with cases of under-assessment or the like which may be disclosed as a result of such reopening.

Mr. Kesava Ayyangar referred to Palaniappa Chettiar v. Commissioner of Income-tax A.I.R. 1930 Mad. 126. We are unable to gather anything from this decision which supports the contention at present raised with regard to the requirements of the notice. That was a case where the Income-tax Officer issued a notice under section 34 of the Act (as it stood then) for the purpose of raising the rate of tax on the grounds that the rate originally fixed was too low. The assessees demanded that the Income-tax Officer should reassess his income, that is to say, determine afresh the correct taxable income of the assessee. The argument was that the Income-tax Officer was bound to begin proceedings again as regards assessment and proceed as if there was an enquiry in respect not only of the portion which had escaped assessment but of all other items also. That contention was repelled. But it may be noticed that even apart from not answering the particular contention now advanced, this decision related to the interpretation of section 34 as it stood prior to the amendment in 1939, when the section was far differently worded.

In Presidency Talkies v. First Additional Income-tax Officer, Madras [1954] 25 I.T.R. 447 a similar question arose. The learned judges observed:

"The scheme of section 34 of the Act is that if the conditions of the main section are satisfied, a notice has to be issued to the assessee containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22. But before issuing the notice, the proviso requires that the officer should record his reasons for initiating action under section 34 and obtain the sanction of the Commissioner who must be satisfied that the action under section 34 was justified. There is no requirement in any of the provisions of the Act or any section laying down as a condition for initiation of the proceedings that the reasons which induced the Commissioner to accord sanction to proceed under section 34 must also be communicated to the assessee..........It is not intended by the proviso that the reasons should be communicated to the assessee."

The learned judges also observed that it was unnecessary for the notice to state whether the Income-tax Officer was limiting the assessment for the period of eight years or four years, that is to say, whether it was a case which the Income-tax Officer thought came within the scope of 34(1)(a) or 34(1)(b).

In Mukherjee v. Commissioner of Income-tax [1956] 30 I.T.R. 535 the Calcutta High Court pointed out that section 34 is only a section authorising the issue of a notice, that is, a notice under section 22(2), and that it is not necessary or imperative that a notice under section 34 should specify under which of the two clauses of the section, viz., clause (a) or clause (b), the notice was issued. The learned judges observed that [1956] 30 I.T.R. 535, 546 "all that the section itself says is that the Income-tax Officer may 'serve on the assessee...a notice under sub-section (2) of section 22'. The main notice to be issued is, therefore, a notice under section 22(2) of the Act and section 34 only authorises the issue of such a notice, in spite of there having been a previous assessment or in spite of the time for the issue of a notice in the normal way having expired. It is true that when answering a notice issued under the section, the assessee may take a plea of limitation, and for purposes of such a plea, it may be necessary for him to know whether his case is being treated as one under clause (a) or as one under clause (b). It appears to me, however, that whether the case is treated as coming under one clause or the other, will transpire in the course of the assessment proceedings, and it is neither required of the Income-tax Officer nor is it necessary, that he should specify the clause in the notice itself. Even when a clause is specified, it is conceivably that when making the actual assessment, the Income-tax Officer may come to hold that it comes under the other clause....."

It seems to us that these decisions completely answer the above contention.

It has been mentioned earlier that in so far as Mohammad Ibrahim Maracair is concerned, there had been certain earlier proceedings under section 34 in connection with the assessment years 1949-50 to 1951-52. It is argued that there cannot be a second proceeding under section 34. The argument is put somewhat in this manner. Section 23 authorises the making of an order of assessment in the normal course. The power to make such an assessment exhausts itself when once it is exercised. So also, it is claimed, the power to reopen an assessment should be deemed to be exhausted when resort to that provision has been had once. We are really unable to appreciate this argument. Section 34 was intended to deal with cases of escapement of income to tax, broadly speaking. It may happen that the Income-tax Officer comes to know that a particular item of income had escaped assessment and take steps to bring that income to tax by way of proceedings under section 34. If the underlying intendment of the section is to deal with cases of escaped income, we fail to see why the Income-tax Officer should be prevented from having resort to that provision when on a subsequent occasion he becomes aware that another item of income had also escaped assessment. The section could be resorted to only within the period of limitation prescribed and it can be invoked in our opinion on any number of occasions which justifies resort to it. The only limit upon the exercise of that power is that the proceeding should be within the period of limitation prescribed. In Commissioner of Income-tax v. Lakshmana Iyer [1945] 13 I.T.R. 242, the court had before it a case where section 34 had been invoked on a second occasion in the case of the same assessee. The point, however, was not decided therein whether the reopening of an assessment could be effected on more than one occasion. The question came to be considered specifically by a single judge of the Calcutta High Court in Jagmohan Goenka v. K.D. Banerjee [1954] 26 I.T.R. 637. The learned judge observed that within the time limit specified in section 34 of the Indian Income-tax Act, there is no restriction as to the number of proceedings that can be taken to reopen the assessment by way of assessment or reassessment, computation or re-computation. We agree with this view of the learned judge. The same view was taken by the Punjab High Court in Atma Ram Bindra Ban v. Commissioner of Income-tax [1960] 39 I.T.R. 418. The question was very shortly disposed of with the observation:

"A simple reading of the sub-section leaves no doubt that it places no limit to the number of notices that may be issued, so long as they are within the time limit specified in that section. There can be no restriction as to the number of proceedings that can be taken to reopen the assessment where it is found that any income of the assessee has for one reason or another escaped assessment."

Whatever arguments might be available to the assessee to claim that section 34 authorises only the reopening of an assessment and not he reopening of a reassessment stand obviated by the decision of the Supreme Court in Lakshman Shenoy v. Income-tax Officer, Ernakulam [1958] 34 I.T.R. 275 ; [1959] S.C.R. 751, where their Lordships held that the word "assessment" is capable of bearing only a comprehensive meaning and would include reassessment. It follows that solely for the reason that in respect of the two assessment years there had been a reassessment of the assessee's income by proceedings under section 34 does not bar the exercise of the power under section 34 of the Act in reopening such a reassessment.

On a question of fact, we may point out that the assessee was fully aware of the reason for the reopening of the assessment in this case. In the assessment order for the assessment year 1948-49, the Income-tax Officer states that when the assessee submitted a return in response to the notice under section 34, he correctly declared his degree of residence as non-resident. While in the earlier returns filed he had not completed that part of the prescribed form showing the degree of residence, but by giving his address as Panruti had left it to be inferred that he claimed to be a resident, in the subsequent return, he gave his degree of residence as non-resident. In the assessment order relating to 1947-48 also, the assessee filed a letter dated 15th November, 1956, in which he admitted that he was a permanent resident of Karaikal, that is to say, a non-resident, but at the same time questioned the validity of the proceedings as illegal and barred by limitation. There is no doubt, therefore, that the assessee was fully aware of the reasons that led to the reopening of the assessment.

We have next to consider whether the present case would fall within sub-clause (a) or (b) of section 34(1). That would lead us to a consideration of the question whether the disclosure of the status of the assessee as a resident or non-resident is not a material fact necessary for his assessment. The law broadly stated imposes the liability to tax on the income of any assessee at a rate dependent on the total world income. In the particular case of a non-resident, who has income accruing or arising both within and without the taxable territories, the income arising without the taxable territories is brought to tax, but at a rate dependent upon his total world income. Leaving aside the question of the validity of section 17 of the Act, as the law stands, the facts whether a person is a resident or a non-resident is undoubtedly a material fact necessary for making a proper assessment upon him. The incidence of tax would vary and it is incumbent upon the assessee to make a disclosure of the particular fact, viz., that he is a resident or a non-resident. It is undoubtedly a material fact necessary for the assessment and it is indisputable that in the present case the assessee had failed to disclose this material fact in his return for the relevant assessment years. This is clearly a case that falls within the scope of section 34(1)(a). It is argued by Mr. Keshava Ayyangar in this regard that there has been no failure on the part of the assessee to disclose this material fact and that at the best it can only be regarded that in consequence of information which the Income-tax Officer came to possess, the assessment had been made at too low a rate. It is alleged that the assessees might have thought that they fell into all the categories of resident, non-resident or resident but not ordinarily resident. This argument is wholly untenable. The factum of residence is a fact which is exclusively within the knowledge of the assessee and so long as the law differentiates the manner in which persons possessing the character of resident or non-resident are assessed, the precise qualification with regard to the residence is a matter which has to be disclosed by the assessee. There has undoubtedly been a failure on the part of the assessee to disclose the material fact. We must repel the argument that the case is one which comes under sub-clause (b).

The result is that the second question is answered in the affirmative and against the assessee.

It is next contended that the provision in the Income-tax Act levying tax at the maximum rate on a non-resident is violative of article 14 of the Constitution. We need not embark upon a discussion of the case law upon the scope of article 14. Suffice it to say courts have uniformly held that discrimination cannot be lightly inferred and that a classification of the subject-matter for legislation is permissible under the Constitution so long as that classification is based upon some real and substantial distinction and has reasonable relation to the object of the legislation. Having thus broadly stated the proposition, it should necessarily follow that the classification of persons for the purpose of levying tax on their incomes on the basis of their status as residents and non-residents is undoubtedly a real one. But what is contended is that for the purpose of levy of tax, such classification and the imposition of a differential levy has no relation to the object of the taxing enactment. It is urged also that the legislature is not competent to tax the other income, that is to say, income which does not arise or accrue within the taxable territories in the case of a non-resident, and that being so, it must equally follow that there can be no lawful authority for the levy of tax on a non-resident at a higher rate dependent upon the extraterritorial income. In so far as a non-resident as a person who earns income within the taxable territories is concerned, undoubtedly a sufficient territorial connection is established between the person sought to be taxed and the country seeking to tax him. That would be sufficient to validate the levy. But it must be emphasised that such territorial connection must be real and the liability sought to be imposed must have a reasonable relation to that connection. It is also undoubted that a taxing enactment is entitled to levy differential rates of tax on different classes of income and to impose also different rates of tax. In so far as income derived from the taxable territory is concerned, it is competent to the Indian legislature to fix the rate of tax upon such income on the basis of any reasonable classification. We are unable to see why the basis of residence is not a valid criterion to be adopted in such a case. If, therefore, the classification as a resident and non-resident would be a proper classification for the purpose of levy of tax, it should equally be open to the legislature to vary the incidence of tax in so far as the two classes are concerned. In fact, the resident is liable to be taxed on his total world income, while a non-resident is liable to be taxed only on the territorial income but at a rate dependent on the total world income. We are not concerned with the question whether tax can be imposed on the non-resident in the same manner as the resident on the total world income. We are only dealing with the question whether a rate of tax dependent upon the classification of the assessee as resident or non-resident has a reasonable relation to the object of the legislation. We are unable to see any constitutional disability in this regard and we cannot agree that article 14 is in any way violated. The question is answered against the assessee.

The assessee will pay the costs of the department. Counsel's fee Rs 250.

Question answered against the assessee.