1964-VIL-37-MAD-DT

Equivalent Citation: [1966] 62 ITR 459

MADRAS HIGH COURT

Tax Case No. 41 of 1962 (Reference No. 20 of 1920)

Dated: 30.04.1964

GENERAL COMMERCIAL CORPORATION LTD

Vs

COMMISSIONER OF INCOME-TAX, MADRAS

For the Petitioner: T. S. Krishnamurthi Iyer

For the Respondent: V. Balasubrahmanyan

Bench

S. Ramachandra Iyer (CJ) And Srinivasan, JJ.

JUDGMENT

S. Ramachandra Iyer, CJ.

This consolidated reference arises out of proceedings relating to the assessment of The General Commercial Corporation Limited, for the assessment years 1948-49 and 1949-50, the assessment for the former year having been initiated under section 34 of the Income-tax Act, 1922. The relevant year of account for the two years in question is the corresponding previous financial year. Three questions have been referred to us for our opinion under the directions issued by this court under section 66(2) of the Act. They are:

"(1) Whether in respect of the assessment for the year 1948-49, section 34(1)(b) proceedings initiated for assessment are illegal and without jurisdiction?

(2) Whether the notice issued in respect of section 34 proceedings for the assessment year 1948-49 is illegal, having not been addressed to or served on the principal officer of the assessee-company?

(3) Whether, in the circumstances of the case, there are materials to justify the adoption of 15 per cent. as the basis for ascertaining the gross profit for the assessment years 1948-49 and 1949-50?"

The first two of the questions set out above arise with respect to the proceedings initiated for the year 1948-49 and the third question is common to both that year and the one following. Before proceeding to answer these questions, we have to set out a few introductory facts.

On August 8, 1944, one Ramamurti and a close relation of his, Subrahmanyan, formed themselves into a partnership for trading in electrical goods at Madras. This business was successful both from the point of view of its volume and of the profit earned, the assessed income for the year 1947-48 being Rs 60,237. On April 4, 1947, the two partners put an end to that firm and formed a private limited company under the name of General Commercial Corporation Limited, which is the assessee in the present case. The other members of the company were a few close relations of these two partners. Its main object was to take over the business of the firm till then run under the same name. The assessee-company carried on its business till May 7, 1948. On that day a new company named "General Commercial Corporation (India) Limited" was formed and the entire business as well as the assets of the assessee-firm were transferred to the new company. In response to a notice under section 22(2) of the Act served on the assessee-company in March, 1949, it filed a "nil" return of its income in May, 1949, for the year 1948-49. In a letter accompanying the return it was stated that there was no previous year corresponding to the assessment year 1948-49. This was accepted by the Income-tax Officer and the assessment proceedings were closed as "not assessable", some time in July, 1949. For the next assessment year, that is, 1949-50, the assessee submitted a return showing a loss in respect of its business from April 7, 1947, to May 7, 1948, a period of thirteen months. This is extraordinary. An assessee has undoubtedly a choice in the method of accounting, namely, of adopting the cash system or the mercantile system. He has also a choice as to the previous year to be adopted for accounting purpose: but the year of accounting can comprise only twelve months and no more. As observed by Mahajan J. in Commissioner of Income-tax v. Srinivasan and Gopalan [1953] 23 I.T.R. 87, 99; [1953] S.C.R. 486.

"The expression 'previous year' substantially means an accounting year comprised of a full period of twelve months and usually corresponding to a financial year preceding the financial year of assessment. It also means an accounting year comprised of a full period of twelve months adopted by the assessee for maintaining his accounts but different from the financial year and preceding a financial year. For purposes of the charging sections of the Act unless otherwise provided for it is correlated to a year of assessment immediately following it, but it is not necessarily wedded to an assessment year in all cases and it cannot be said that the expression 'previous year' has no meaning unless it is used in relation to a financial year..."

In other words, "previous year" can be the previous financial year, or the year, on the basis of a twelve-month period ending before the beginning of the financial year, for which it is less than twelve months: for example, where a business is started during the middle of a financial year and the assessee closes the account at any time before the beginning of the next following financial year. Strangely enough, the Income-tax Officer accepted the assessee's return for the year 1949-50 in toto and he declared that the assessee was not assessable for that year as well. The Commissioner of Income-tax, by virtue of the powers vested in him under section 33B of the Act, set aside the order of assessment and directed the Income-tax Officer to make a fresh assessment for the year 1949-50. In so doing, he found, after looking into the memorandum and articles of association of the assessee-company, that there was a previous year for the assessment year 1948-49, the period from April 7, 1947, to March 31, 1948. He also found that there were serious irregularities in the accounts. For example, a sum of Rs 97,567 was claimed as a deduction in respect of a payment made to the firm of General Commercial Distributors. That firm consisted of two partners, namely, Ramamurti and Subrahmanyam, who were the principal shareholders of the assessee-company. It was conceded by one of the partners before the Commissioner of Income-tax, even at the beginning, that the commission paid to that firm could not be sustained and the assessee would not press for the same. The Commissioner also found, on the merits, that there was no justification for the payment of commission to that firm as its partners were sufficiently remunerated from out of the funds of the assessee-company. The Commissioner gave also another suspicious instance. The stock-in-trade, which was valued at cost price at Rs 4,82,223, was transferred to the new company for Rs 3,75,612, thereby occasioning a loss of Rs 1,06,611. In view of these infirmities, the Commissioner set aside the assessment order made by the Income-tax Officer and directed a fresh assessment.

On receipt of the order, the Income-tax Officer commenced proceedings under section 34 of the Act for the assessment year 1948-49. A notice under section 34(1)(b) was issued on May 5, 1952, and served on Subrahmanyam, who acknowledged the same as the secretary of the managing director of the assessee-company. The company also subsequently accepted the receipt of the notice by its letter to the Income-tax Officer dated June 9, 1952. Objection was taken to the proceedings initiated under section 34 of the Act on the ground that there was no fresh information available with the Income-tax Officer to justify the initiation of such proceedings. That was overruled. On a scrutiny of the accounts, and particularly in the absence of the stock account, it was found that the profits disclosed by the assessee were low. An assessment on the basis of best judgment was made, estimating the gross profit at 20 per cent. for the period April 7, 1947, to March 31, 1948. For the assessment year 1949-50, the Income-tax Officer assessed the profits at the same rate for the period April 1, 1948, to May 7, 1949. The assessments were completed and tax was computed on an income of Rs 1,61,023 for 1948-49 and Rs 1,09,251 for 1949-50. Appeals to the Appellate Assistant Commissioner were without success. On further appeals, the Appellate Tribunal reduced the tax estimate of gross profits to 15 per cent. but otherwise it confirmed the orders of assessment.

The assessment for the year 1948-49 has been challenged before us on two grounds, namely, that when the original Income-tax Officer came to the conclusion that there was no previous year for the accounting year 1948-49, it was only a wrong conclusion reached by him and the mere fact that the Commissioner of Income-tax, at a later time, found that there was a previous year to the assessment year would not amount to an "information" within the meaning of section 34(1)(b) of the Act so as to justify the initiation of proceedings under that section. As we pointed out earlier, when the Income-tax Officer originally issued notice under section 22(2) of the Act, the assessee stated that there was no previous accounting year for 1948-49, inasmuch as it had commenced its business on April 7, 1947, and closed its accounts on May 7, 1948. We have also pointed out that it was open to the assessee to choose his own period of account: the only condition is that such period should not exceed a year. If, for example, the assessee were to have his accounts from April 7, 1947, to April 6, 1948, there will be no previous year for 1948-49 but there would be one for 1949-50. The remaining period, namely, April 7, 1948, to May 7, 1948, will, in that case, relate to the assessment year 1950-51. Therefore, the question whether there was a previous year to 1948-49 will depend on the facts disclosed to the officer. It does not appear that the assessee gave information in the first instance about its memorandum and articles of association. Article 23 of the latter states that "the company's financial year shall be the year ending 31st March of each year". After the assessee-company closed its business, there was an attempt on May 15, 1948, to pass a special resolution so as to amend that article stating that "the company's financial year shall be the year ending 6th May of each year". But, as pointed out by the Income-tax Officer later, this was an obvious attempt to support the case that there was no year of account relating to 1948-49. The view of the Income-tax Officer is completely supported by the assessee's letter dated March 15, 1948, where, while referring to the advance tax to be paid, it was stated that the assessee was sticking up to the original year of account ending with 31st March of each year. This shows that the assessee- company had a previous year to the assessment year 1948-49.

Section 34(1)(b) of the Act provides for additional assessment in cases where the income had escaped full assessment, where the Income-tax Officer, in consequence of information in his possession, has reason to believe that the income had escaped assessment or full assessment, as the case may be. Learned counsel for the assessee contended that the term "information" implied something which the Income-tax Officer did not know or could not have, with reasonable diligence, known before: and that as, in the instant case, the Income-tax Officer who, in the first instance, came to the conclusion that there was no previous year to the assessment year 1948-49, had all the relevant information, there was no scope for the application of section 34(1)(b) of the Act. It was also argued that when the Commissioner of Income-tax found that there was a previous year to the assessment year 1948-49, it was only an opinion different from that come to by the Income- tax Officer on the same materials which were available to both although it might be a correct opinion. What existed therefore was a mere change of opinion which could not be regarded as information. Reliance was placed on the decision of the Bombay High Court in Dr. M.R. Dalal v. Commissioner of Income-tax [1963] 49 I.T.R. 492. In that case the assessee had executed a trust deed in favour of his children for a period of seven years, reserving to himself a power to revoke the same at the end of that period. After the trust deed was executed, the children were separately assessed in respect of their shares of income from the trust property; the assessee was assessed in respect of his other income. Even after the seven-year period was over, the assessee's income was assessed as before, with respect to his properties other than the trust properties. But when the trustee submitted his return, as usual, in respect of the income from the trust properties, the Income-tax Officer dealing with that matter found that as the trust had become revocable, the income from the properties, till then set apart for trust, had to be assessed in the hands of the assessee himself and not as the income of the beneficiaries. This was communicated to the Income-tax Officer in charge of the separate assessment of the assessee, the assessment of which had already been completed. The latter officer then initiated proceedings under section 34(1)(b) of the Act. It was held that proceedings under that provision were not properly initiated inasmuch as the information that the trust had become revocable was always available to the Income-tax Officer who assessed the assessee and that the communication made by the other Income-tax Officer did not give any fresh information which would justify the reopening of an assessment already made in respect of the assessee's income. It will be seen that that was a case where the documents, establishing that the trust had become revocable, were available on record to the Income-tax Officer who made the assessment on the assessee. The learned judges, therefore, held that there was no new information with the Income-tax Officer to sustain the reopening of the assessment under section 34(1)(b) of the Act.

Reference was then made to the decision of the same High Court in K.T. Kubal & Co. Pvt. Ltd. v. Commissioner of Income-tax [1963] 49 I.T.R. 433, 444. Tambe J. observed:

"It is not in dispute that to enable the Income-tax Officer to reopen an assessment under section 34(1)(b), it is necessary to establish that the Income-tax Officer had come into possession of some information which was not available to him at the time when he made the assessment orders, and that the fresh information shows that the income chargeable to tax has either escaped assessment or has been under-assessed."

In that case it was found that the information was in the possession of the income-tax authorities even at the time when the original assessment was made. But these decisions, or the principle recognised therein, can have no application to the case before us, where it is not shown that the memorandum and articles of association of the assessee-company were placed before the Income-tax Officer in the first instance. On the contrary, the assessee solemnly made a statement that there was no previous year to the assessment year 1948-49, and this was accepted by the officer. There was thus a fraudulent suppression of a vital fact. However, when the matter came up under section 33B before the Income-tax Commissioner, it was found that under the original article 23 the company had adopted the financial year as its year of account; it was amended by a resolution passed on May 15, 1948, after the closing of the company.

It is true the Income-tax Officer, in the first instance, must have been aware of the fact that an year of account cannot exceed a period of twelve months and that the period for which the return was made should be a portion between two years. To that extent it can be said that the Income- tax Officer was in possession of material showing that the assessment should be distributed between two years. That, however, is not the same thing as saying that assessment should be made for the years 1948-49 and 1949-50. As we pointed out earlier, it may be that if the assessee had adopted the period from April 7, 1947, to April 6, 1948, as the year of account, the two assessment years during which the company did business would be 1949-50 and 1950-51. There was, therefore, no material before the first Income-tax Officer which would have clearly shown that part of the period during which the company earned profits fell within the year previous to the year of assessment 1948-49. Information in that regard came to the Income-tax Officer only when the Commissioner of Income-tax was able to find it out. There was, therefore, sufficient jurisdiction in the Income-tax Officer to initiate proceedings under section 34 of the Act. Our answer to the first question will be in the negative and against the assessee.

Question No. 2.--Mr. Krishnamurthi Ayyar on behalf of the assessee contended that the assessee being a company, notice under section 34 issued by the Income-tax Officer should be addressed to the principal officer of the company and not to the company itself; that not having been done in the present case, the entire assessment proceedings should be regarded as null and void. In its statement of the case the Appellate Tribunal has pointed out that this objection was not taken in the grounds of appeal before the Appellate Assistant Commissioner. But it was so taken before the Tribunal which, however, did not deal with it in its judgement. As we are of opinion that there is no substance in the objection itself, it is unnecessary to consider whether the assessee would be entitled to urge this point as an objection to the assessment at the present stage.

Section 34 states that the Income-tax Officer should serve, if the assessee be a company, on its principal officer a notice in accordance with the requirements of that section. Issue of notice is undoubtedly a condition precedent to the validity of any assessment of income, which had escaped assessment or had been under-assessed and in respect of which proceedings are taken under section 34 of the Act. If notice is not served in the manner prescribed by section 34, it will go to the root of the matter; there cannot even be a waiver of that illegality by the assessee: see Tansukhrai Bodulal v. Income-tax Officer [1962] 46 I.T.R. 325 (F.B.).

The question in the present case is, whether service on the secretary of the managing director of the company could be sufficient compliance with the provisions of section 34 which contemplates service on the principal officer. Section 2(12) of the Act defines a "principal officer", with reference to a company as meaning the secretary, treasurer, manager or agent. But the secretary of the managing director will not be the principal officer, though the latter will be one. The notice cannot be addressed to him. It was not so done in this case as it was addressed to the company itself. It is, however, argued that it must have been addressed to the principal officer of the company. We are, however, unable to find any support for the contention that the notice under section 34 should be addressed to the principal officer of the company. That section only states that the notice should be served on the principal officer and not that it should be addressed to the principal officer. Notice should under the law be addressed to the assessee. What section 34 prescribes is that such notice to the assessee-company should be served on its principal officer. Section 63 of the Act provides for the manner of service of notice. That provision enables the effectuation of service on the principal officer of a company. It is argued that Subrahmanyam was only the secretary of the managing director and service of notice upon him will not be equivalent to service on the managing director. Reliance was placed, in this connection, upon two decisions of the Kerala High Court in Commissioner of Income-tax v. Thayaballi Mulla Jeevaji Kapasi [1963] 47 I.T.R. 184 and M.O. Thomas v. Commissioner of Income-tax [1963] 47 I.T.R. 775. In the former case the service of the notice was made on the son of an assessee. It was held that it was not proper service for the purpose of section 34 of the Act. In the latter case there was service by affixture but there was no affidavit from the serving officer and it was held that the service was improper. Neither could be proper service. In the present case, there is no such infirmity. Service must be deemed to have been effected on the principal officer, namely, the managing director through his secretary, who was authorised to receive such notices or, at any rate, the receipt by him had been acknowledged on behalf of the company subsequently. A notice under section 34 of the Act must no doubt be served, if the assessee happens to be a company, on its principal officer. But it will be open to the principal officer himself to authorise some other person to receive notices on his behalf. In Kundan Lal Vedi v. Commissioner of Income-tax [1958] 34 I.T.R. 414, notice of reassessment proceedings could not be served on the assessee personally, as he was laid up as a result of a paralytic stroke and unable to sign the acknowledgment for the receipt of the notice. The notice was received under the direction of the assessee by his accountant, who had previously accepted notices on behalf of the assessee. The Punjab High Court held that such a notice having been received on behalf of the assessee, it was valid. We agree with that view. Accordingly, we answer the second question in the negative and against the assessee.

Question No. 3.--The next question relates to the estimate of the gross profits. The Income-tax Officer as well as the Appellate Tribunal held that it was not possible to ascertain the true profits earned by the assessee from the accounts produced before them, and that the proviso to section 13 of the Act was attracted. That conclusion has not been challenged before us. The department found, by comparing the cases of manufacturers, that the gross profits can be estimated at 20 per cent. But the Tribunal reduced that estimate by 5 per cent. as the assessee- company was only an importer and not a manufacturer. The assessee insists that the results disclosed by the books of account should be accepted. That shows a gross profit of 8.1 per cent. Having regard to the fact that the assessee's method of accounting did not meet with the approval of the income-tax authorities, the book results could not reasonably be adopted. The question being one for estimate, we cannot say that the Tribunal was acting without any material when it based its conclusion as to the assessee's profits at three-fourths of the manufacturer's profit. Our answer to the third question will be in the affirmative and against the assessee.

The assessee will pay the costs of the department. Advocate's fee Rs 150.