1963-VIL-31-KAR-DT

Equivalent Citation: [1964] 52 ITR 882

MYSORE HIGH COURT

Income-Tax Reference Case No. 4 of 1962

Dated: 10.07.1963

S. NATARAJAN

Vs

COMMISSIONER OF INCOME-TAX, MYSORE

For the Assessee: K. Srinivasan

For the Commissioner: D. M. Chandrasekhar

Bench

K. S. Hegde And Ahmed Ali Khan, JJ.

JUDGMENT

K. S. Hegde, J.

By these applications under section 66(1), the assessee requires the Tribunal to draw up a statement and to refer certain questions of law which are said to arise out of the said order. In our opinion, a question of law arises out of the aforesaid Tribunal's order, we draw up a statement of the case, agreed to by both the parties, and refer it to the High Court. As the facts are common a consolidated statement of the case is drawn.

The assessee started a film distribution business under the name and style of M/s. Zenith Movies on October 27, 1951. Books of account in respect of the above business were closed on 31st October of every year.

In the belief that the assessee would have earned a taxable income in respect of the assessment years 1953-54, 1954-55 and 1955-56, proceedings were initiated by the Income-tax Officer under section 34 in respect of these years by issue of notice dated May 30, 1957, and served on June 3, 1957. These notices were accompanied by forms of return.

In the returns made in response to the notices, the assessee claimed losses of Rs 17,266, Rs 36,012 and Rs 43,702 for the assessment years 1953-54, 1954-55 and 1955-56 respectively. The Income-tax Officer on receipt of the said returns, issued notices under section 23(2) of the Income- tax Act to the assessee for the three assessment years and examined the evidence adduced by the assessee in support of the returns filed. The Income-tax Officer by his orders dated August 10, 1959, August 8, 1959, August 8, 1959, passed respectively for the assessment years 1953-54, 1954-55 and 1955-56 under section 23(3) read with section 34 of the Income-tax Act held that the losses returned were fully substantiated and held further that the assessee was not entitled to have this loss assessed for purposes of carry-forward and set-off against future assessments, observing that section 34 cannot be brought into play in this case; and that if the assessee really intended that his loss should be assessed and carried forward he should have filed returns declaring the losses under section 22(2A) of the Act........

Before the Tribunal it was contended that section 22(2A) of the Income- tax Act was applicable to a case where an assessee was served with a notice under sub-section (2) of section 22 of the Act and the notices issued to the assessee under section 34 of the Income-tax Act for the three assessment years along with the return forms were notices under section 22(2) of the Act.

The Tribunal for the reasons stated in its order dated May 16, 1961, passed I.T.A. Nos. 8790, 8791 and 8792 of 1959-60 negatived the assessee's contentions and dismissed the appeals..........

Though the assessee has raised four questions, we consider that the following question is comprehensive enough to bring out the point in issue:

"Whether in the circumstances of the case, the assessee was entitled to carry forward the losses substantiated by the Income-tax Officer for the assessment years 1953-54 to 1955-56 under section 24(2)(iii) of the Act?"

[After setting out the statement of the case as above K.S. HEGDE J. continued.]

The short point for consideration is whether in a proceeding under section 34, initiated for the purpose of assessing an income alleged to have escaped assessment, or which was considered to have been under-assessed, or assessed at too low a rate or subject of excessive relief, the Income-tax Officer could grant relief to the assessee under section 24(2)(iii) of the Income-tax Act, 1922 (to be referred to hereinafter as the "Act") if he comes to the conclusion that in the relevant years the assessee had suffered losses.

In order to answer the above question, it is necessary to refer to the material portions of sections 22 and 34 of the "Act". Only sub-sections (1), (2) and (2A) of section 22 are relevant for our present purpose. They read as follows:

"22. (1) The Income-tax Officer shall, on or before the 1st day of May in each year, give notice, by publication in the press and by publication in the prescribed manner, requiring every person whose total income during the previous year exceeded the maximum amount which is not chargeable to income-tax to furnish, within such period not being less than sixty days as may be specified in the notice, a return, in the prescribed form and verified in the prescribed manner, setting forth (along with such other particulars as may be required by the notice) his total income and total world income during that year:

Provided that the Income-tax Officer may in his discretion extend the date for the delivery of the return in the case of any person or class of persons.

(2) In the case of any person whose total income is, in the Income-tax Officer's opinion, of such an amount as to render such person liable to income-tax, the Income-tax Officer may serve a notice upon him requiring him to furnish, within such period, not being less than thirty days, as may be specified in the notice, a return in the prescribed form and verified in the prescribed manner setting forth (along with such other particulars as may be provided for in the notice) his total income and total world income during the previous year:

Provided that the Income-tax Officer may in his discretion extend the date for the delivery of the return.

(2A) If any person, who has not been served with a notice under sub- section (2) has sustained a loss of profits or gains in any year under the head 'profits and gains of business, profession or vocation', and such loss or any part thereof would ordinarily have been carried forward under sub- section (2) of section 24, he shall, if he is to be entitled to the benefit of the carry-forward of loss in any subsequent assessment, furnish within the time specified in the general notice given under sub-section (1) or within such further time as the Income-tax Officer in any case may allow, all the particulars required under the prescribed form of return of total income and total world income in the same manner as he would have furnished a return under sub-section (1) had his income exceeded the maximum amount not liable to income-tax in his case, and all the provisions of this Act shall apply as if it were a return under sub-section (1)."

Now we may proceed to quote the relevant portion of section 34.

"34. (1) If--

(a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year,.........or have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has been computed, or

(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed,

he may in cases falling under clause (a) at any time...and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that subsection." (Underlining is ours)(Here printed in italics).

The only other portion of section 34 with which we are concerned is sub-section (2) of section 34 which reads:

"34. (2) Where an assessment is reopened in circumstances falling under clause (b) of sub-section (1) the assessee may, if he has not impugned any part of the original assessment order for that year either under section 30 or under section 33A, claim that the proceedings under sub-section (1) of this section shall be dropped on his showing that he had been assessed on an amount or to a sum not lower than what he would be rightly liable for even if the items alleged to have escaped assessment had been taken into account, or the assessment or computation had been properly made:

Provided that in so doing he shall not be entitled to reopen matters concluded by an order under section 33B or section 35, or by a decision under section 66 or section 66A."

This clause was introduced by means of an amendment to the "Act" in the year 1948.

Now we may proceed to notice the contentions advanced on behalf of the assessee. It was urged on his behalf that every notice under section 34(1) in law is also a notice under section 22(2); that being so, the assessee is entitled to put forward his claim for losses as contemplated in section 22(2A) and the Income-tax Officer is bound to grant him relief under section 24(2)(iii). In support of this contention, emphasis was laid on the fact that section 34(1) specifically says:

"The provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section."

On the basis of this clause, it was urged that as soon as a notice under section 34(1) is given, the assessment proceedings are reopened and the parties are placed in the same position as if a notice had been given under section 22(2). This contention was further tried to be supported by pointing out that a proceeding under section 34(1) may some time result in an assessment under section 23 ; that is so because a return in response to a notice under section 34(1) is deemed to be a return under section 22.

The above argument clearly overlooks certain basic principles underlying section 34. It is now well settled that in a proceeding initiated under section 34, the taxing authorities have to confine their attention to the circumstances mentioned in section 34(1) such as escaped income etc. In other words, the scope of an enquiry under section 34 is a very limited one. It does not cover the entire field covered by section 23. That is made clear from the language of section 34(1) itself. It says:

"The Income-tax Officer may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section."

On a plain reading of section 34, it is clear that an enquiry under that provision is confined to such income, profits or gains which has escaped assessment, or which was under-assessed or which was assessed at too low a rate or was the subject of excessive relief under the "Act". A proceeding under that section cannot be used for finding out the true total income of the assessee afresh. In other words, in an enquiry under section 34, no duty is cast upon the Income-tax Officer to start an enquiry with reference to the total income of the assessee during the assessment year. The Income-tax Officer has no such power. Nor has the Income-tax Officer any power to revise the original assessment except to the limited extent to which such power is recognised under section 34.

In P.L.M.P.L. Palaniappa Chettiar v. Commissioner of Income-tax [1929] 4 I.T.C. 196 a Special Bench of the Madras High Court laid down that under section 34 of the "Act", an Income-tax Officer is not bound to determine afresh the correct taxable income of the assessee. In the course of the judgment, Kumaraswami Sastri J. who spoke for the Special Bench observed:

"We do not think that section 34 requires the whole thing to be reopened and every item under which income-tax is charged to be considered afresh and a fresh assessment levied. In one sense, of course, he must fix the taxable income to enable him to fix the rate, but he is not bound to reopen the items which are not in question or which have become final and start proceedings again. We think he is only bound to confine himself to the particular item which has been omitted."

In In re Kashi Nath Bagla A.I.R. 1932 All 1; 4 I.T.C. 472 a Bench of the Allahabad High Court laid down that "the words in the latter part of section 34 'assess or reassess such income, profits or gains' must be taken to refer to the income, profits or gains chargeable to income-tax which have escaped assessment referred to in the prior part of the section". Accordingly, in a proceeding under section 34 the Income-tax Officer and the Assistant Commissioner can only deal with the extra income which has not been assessed to income-tax. No jurisdiction is given to either of these officers by section 34 to make a new assessment for the purpose of taxing the whole of that assessment under the Income-tax Act. The provisions in section 34 limit the action of the income-tax authorities to the assessment of income with has previously escaped assessment or which has been assessed at too low a rate. Section 34 does not confer on the authorities a power of revision of a previous assessment and if the revision results in showing that that assessment under section 23(4) is too much even then the income-tax authorities are precluded from granting any further relief to the assessee.

A similar view was taken by a Full Bench of the Calcutta High Court in In re Satyendra Mohon Roy Chowdhury A.I.R. 1930 Cal. 627. Therein the Full Bench laid down that section 34 does not point to an intention to reopen the whole assessment before being rendered liable to further tax. It is not for the court to consider whether there is any real injustice or inconvenience in refusing to reopen the whole assessment. In the course of the judgment Rankin C.J. who delivered the judgment of the Bench observed thus:

"On this footing, I am unable to say that the language of section 34 points to an intention to give to the assessee a right to reopen the whole assessment before being rendered liable to further tax. It is not for the court to determine whether the administrative inconvenience entailed by such a right would be much or little, or whether it would afford any sufficient reason for refusing to the assessee a right to reopen the whole matter. Nor is it for the court to consider whether there is any real injustice or inconvenience in refusing this right to an assessee who has failed to make a return. Such considerations are questions of policy and debatable as such. As a matter of the true construction of this section it appears to me that if the legislature had meant to say that if in any case it appears to the Income- tax Officer that an assessee has been assessed upon too low a figure or at too low a rate, the Income-tax Officer may issue a fresh notice under section 22(2) and may proceed to reassess such assessee afresh, the language employed would have been noticeably different from that which we find in the present section."

When section 34(1) says that "the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section", it only creates a legal fiction. As laid down by the Supreme Court in Bengal Immunity Co. Ltd. v. State of Bihar [1955] 6 S.T.C. 446 (S.C.) the legal fiction is to be limited to the purpose for which it was created and should not be extended beyond that legitimate field. Hence in a proceeding under section 34, assistance from other provision in the "Act" can be taken only to "assess or reassess such income, profits or gains or recompute the loss or depreciation allowance", mentioned in section 34. Any relief under section 24(2)(ii) can only be given "in the course of the assessment of the total income of the assessee" as is made clear by that provision itself and not in a proceeding under section 34. In this connection we may refer to the decision of the Madras High Court in Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax [1950] 18 I.T.R. 906. Therein it is laid down that a proceeding initiated under section 34 confined only to assessing the income which had escaped assessment, etc. and is not intended for assessing the total income of an assessee; the relief contemplated by section 24(2)(iii) can be granted only in the course of the assessment of the total income of the assessee; hence, the Income-tax Officer in a proceeding under section 34 cannot grant the relief to the assessee in respect of losses. This case directly bears on the point under consideration. In our judgment, if we may say so with respect, that decision lays down the law correctly.

Sri K. Srinivasan, the learned counsel for the assessee, tried to get out of the ratio of that decision on the ground that the same was rendered in an assessment proceeding which had been commenced before sub-section (2) to section 34 was enacted. We fail to see how the addition of sub-section (2) to section 34 could make any difference. That sub-section merely gave an additional relief to the assessee. In fact the addition of sub-section (2) is a pointer to the fact that the scope of an enquiry under section 34 is a very limited one. If in that enquiry the total income of the assessee could be reassessed in accordance with the provisions contained in section 23, there was no need to add that sub-section. Hence, the legislative history is also against the contention advanced by Sri Srinivasan.

In support of his contention that a notice under section 34 is a notice under section 22(2) in all respects, Sri Srinivasan read to us a number of decisions. The first decision cited by him is that of P.R. Mukherjee v. Commissioner of Income-tax [1956] 30 I.T.R. 535. We fail to see what assistance Sri Srinivasan can take from that decision. The only passage that he read from that decision is one found at page 546 which says:

"All that the section (section 34) 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."

In that case, the court was not called upon to consider the scope of the enquiry under section 34. The court was merely considering whether the subsequent assessment made in that case was valid under section 34(1). The decision in question does not bear on the point under consideration. Similarly, the decision of the Patna High Court in Bhimraj Panna Lal v. Commissioner of Income-tax [1957] 32 I.T.R. 289 ; A.I.R. 1957 Pat. 638 has no relevancy on the point under consideration. In that case it was laid down that "the procedure under notice referred to in section 34 is to be, as far as may be, the same as would be applied in case of an original notice under sub-section (2) of section 22. The failure to make any return at all as required by section 22(2), or to produce the account books, etc., called for as required by section 22(4) would have to be dealt with under sub-section (4) of section 23 and, therefore, other provisions of sub-section (4) of section 23 will apply to the proceeding under section 34 of the Act". Similarly we are of the opinion that the decision of the Assam High Court in Tansukhrai Bodulal v. Income-tax Officer, Nowgong [1962] 46 I.T.R. 325, does not bear on the point under consideration.

In the result, our answer to the question referred to us is in the negative. In other words, our answer is that in the circumstances of the case, the assessee was not entitled to carry forward the losses held to be proved by the Income-tax Officer for the assessment years 1953-54, 1954-55 and 1955-56 under section 24(2)(iii) of the "Act". The assessee to pay the costs of the Revenue.

Advocate's fee Rs 250.

Question answered in the negative.