Murlidhar Madanlal v. Commissioner Of Income Tax — 1954 DIGILAW 67 (PAT)

Judgment 1. In this case the assessee is a firm consisting or two partners, Murlidhar Surekha and Madanlal Modi, having an equal share in the firm. For the assessment year 1947-48 the firm submitted a return of income under Sec.22(2), Income-tax Act. The return showed that the firm had received an income of Rs. 22346/- from trade in cloth. Acting under the provisions of Sec.22(4), Income-tax Act, the Income-tax Officer called upon the asssee to produce account-books for the years 1350-51 and 1352 fasli. It should be stated that the accounting year in this case corresponds to the period from 27-7-1944 to 12-8-1945 (which is roughly equivalent to 1352 fasli). On 3-8-1946 the Income-tax Officer issued another notice against the assesses under Sec.22(4) asking it to produce the accounts for the three years, 1348, 1349 and 1350 fasli. The Income-tax Officer adopted this procedure since he found that the assessee had manipulated its accounts for the previous years and had returned false figures as to its income. The Income-tax Officer, therefore, found it necessary to call for the accounts for the arrear years, and to quote his language "a correct appraisement of the accounts of the previous year, which, being a continuation of the past accounts was really dependent upon the assets and liabilities derived from old." On 9-8-1946 the assessee produced account books for the years 1351 and 1352 fasli. As requested by the assessse, the Income-tax Officer granted him time to produce the accounts for the arrear fasli years. Several opportunities were granted to the assessee, but the account books from 1348 to 1350 fasli were not produced before the Income-tax Officer during the assessment proceedings. It was explained on the part of the assessee that the account books were kept at Bajputana, but Murlidhar, one of the partners, admitted that no effort had been made to fetch the account books from Rajputana. Murlidhar further stated that there was a dispute between the partners, and account books could not be produced also for that reason. The defendants explanation was rejected by the Income-tax Officer who reached the conclusion that the account books from 1348-1350 fasli were being deliberately withheld. The Income-tax Officer, therefore, completed the assessment under Sec.23(4), Income-tax Act. The income of the assessee was estimated to be Rs. The defendants explanation was rejected by the Income-tax Officer who reached the conclusion that the account books from 1348-1350 fasli were being deliberately withheld. The Income-tax Officer, therefore, completed the assessment under Sec.23(4), Income-tax Act. The income of the assessee was estimated to be Rs. 60,000.00 for the assessment year in question, and tax was imposed upon the assessee with regard to the estimated income. The firm of the assessee was registered up to the assessment year, 1945-46, but for the assessment year 1946-47 the Income-tax Officer refused registration of the firm on the ground that there had been default. The assessee made an application to the Income-tax Officer on 4-12-1947 for reopening the assessment under Sec.27. This application was rejected by the Income-tax Officer on the ground that there was no case made out on the part of the assessee for reopening the assessment proceedings. The assessee preferred three appeals before the Appellate Assistant Commissioner of Income-tax (1) against the quantum of assessment under Sec.23(4); (2) against the order rejecting the application under Sec.27; and (3) against the refusal of the Income-tax Officer to register the firm. The Appellate Assistant Commissioner allowed the appeal as regards the quantum of assessment and reduced the estimate of income to the sum of Rs. 40,000/-. But the other two appeals preferred by the assessee were dismissed. Against the order of the Appellate Assistant Commissioner the assessee took the three appeals to the Income-tax Appellate Tribunal. As regards the quantum of assessment, the Income-tax Appellate Tribunal reduced the estimated income to the figure of Rs. 40,000/-. The Tribunal, however, dismissed the appeals with regard to the order passed by the Income-tax Officer under Sec.27 and the refusal of the Income-tax Officer to register the firm for the assessment year 1946-47. Under Sec. 6(5(1), Income-tax Act, the assessee applied to the Income-tax Appellate Tribunal for referring the case to the High Court on several questions of law. The assessee had prayed to the Tribunal that the question as regards registration of the firm and as to dismissal of the application under Sec.27 should be referred to the High Court. Under Sec. 6(5(1), Income-tax Act, the assessee applied to the Income-tax Appellate Tribunal for referring the case to the High Court on several questions of law. The assessee had prayed to the Tribunal that the question as regards registration of the firm and as to dismissal of the application under Sec.27 should be referred to the High Court. The Tribunal has rejected the application of the assessee on these points but has referred only the following question of law for the opinion of the High Court: "Whether the completion of the assessment for 1946-47 under Sec.23(4), Income-tax Act, for the non-production of the accounts of Fasli years 1349 and 1350, in response to a notice under Sec.22(4) of the Act, which called for the production of the accounts for Fasli years 1348 to 1350, was legal having regard to the proviso to Sec.22(4) of the Act." 2. The contention put forward by Mr. Untwalia on behalf of the assessee is that the notice issued under Sec.22(4) of the Act is wholly illegal and that the Income-tax Officer could not legally proceed under Sec.23(4), Income-tax Act, and make estimate of the income of the assessee to the best of his judgment. The argument of the learned counsel is based upon Sec.22(4) of the Act which is in the following terms : "The Income-tax Officer may serve on any person who has made a return under Sub-section (1) or upon whom a notice has been served under Sub-section (2) a notice requiring him, on a date to be therein specified, to produce, or cause to be produced, such accounts or documents as the Income-tax Officer may require: Provided that the Income-tax Officer shall not require the production of any accounts relating to a period more than three years prior to the previous year." It was contended that the Income-tax Officer had no warrant for asking the assessee to produce the account books for the year 1348 fasli since there was an express prohibition in Sec.22(4) of the Act which debars the Income-tax Officer from calling for the production of the account books relating to a period more than three years prior to the previous year. It was conceded by Mr. It was conceded by Mr. Untwalia that the Income-tax Officer could validly require the assessee to produce account books for the years 1349, 1350 and 1351 fasli; but the argument was that the whole notice was illegal and the Income-tax Officer had no jurisdiction to proceed against the assessee under Sec.23(4) for non-compliance with the illegal notice. In this connection it is necessary to consider the language of Sec.23(4) which states: "If any person fails to make the return required by any notice given under Sub-section (2) of Sec.22 and has not made a return or a revised return under Sub-section (3) of the same section or fails to comply with all the terms of a notice issued under Sub-section (4) of the same section or, having made a return, fails to comply with all the terms of a notice issued under Sub-section (2) of this section, the Income-tax Officer shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment and, in the case of a firm, may refuse to register it or may cancel its registration if it is already registered." If Sec.23(4) is closely examined it is clear that the Income-tax Officer has jurisdiction to proceed under this sub-section if the assessee fails to comply with all the terms of the notice issued under Sec.22(4) of the Act. The argument advanced by Mr. Untwalia is that there is no legal notice under Section 22(4) and therefore there was no default on the part of the assessee under Sec.23(4), and the Income-tax Officer had no jurisdiction to make estimate of the income of the assessee to the best of his judgment under the provisions of Sec.23(4). In our opinion there is a fallacy lurking in the argument addressed by Mr. Untwalia. It is true that the Income-tax Officer had no power to call upon the assessee to produce account books for the year 1348 fasli but the notice under Sec.22(4) printed at page 8 of the paper book shows > that the assessee was called upon to produce account books not only for 1348 fasli but also for 1349 to 1352 fasli. The notice may be illegal so far as the demand for the account books of the year 1348 is concerned but that does not mean that the notice is illegal so far as the Income-tax Officer required the assessee to produce account books for the years 1349 fasli to 1352 fasli. In our opinion the notice under Sec.22(4) so far as the demand for the account books of the year 1348 is concerned is clearly severable from the notice which required the assessee to produce account books for the years 1349 to 1352 Fasli. The illegality as regards the demand of the account books for the year 1348 is clearly severable from the rest of the terms of this notice which are admittedly legal. The position is as if two notices had been issued, one requiring the assessee to produce account books for the year 1348 Fasli and the other requiring the assessee to produce account books for the years 1349 to 1352 fasli. Since the illegal portion of the notice is clearly severable from the legal portion of the notice we are unable to accept the argument of Mr. Untwalia that the whole notice is bad for non-compliance of the proviso to Sec.22(4). If we are right in holding that the notice under Sec.22(4) is not illegal so far as the account books for the years 1349 to 1352 are concerned then the assessee is clearly guilty of non-compliance with the terms of the legal portion of the notice and the Income-tax Officer had jurisdiction to hold that there was default on the part of the assessee to make estimate oi his income to the best of his judgment under the provisions of Sec.23(4) of the Act- In our opinion the proceedings taken by the Income-tax Officer in completing assessment for the year 1943-47 under Sec.23(4) of the Act were perfectly valid and we do not think that the assessment order is in any way illegal. 3. In the course of his argument Mr. 3. In the course of his argument Mr. Untwalia made reference to an Allahabad case, --Kajori Mal Kalyan Ma], In the matter of, AIR 1930 All 209 (A) in which it was held that the Income-tax Officer was bound to give the proposed assessee at least thirty days time within which to file a return and if this minimum period was denied the notices would become entirely illegal and no subsequent extension of time would cure the defect that initially lay in the notice issued. Sec.22(2) is in the following terms: "In the case of any person whose total income is, in the Income-tax Officers 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." It is clear that Sec.22(2) expressly requires that the Income-tax Officer should give the assessee time to furnish return within such period, not being less than thirty days, as may be specified in the notice. Since the condition as to time was not complied with, the notice given by the Income-tax Officer under Sec.22(2) became illegal as a whole and that is the view which the learned Judges of the Allahabad High Court have taken. To a similar effect is a decision of the Lahore High Court in -- Jamna Dhar Potdar & Co., Lyallpur V/s. Commr. of Income Tax, Punjab, AIR 1935 Lah 201 (B), where the facts are almost parallel to the facts of the Allahabad case. The next case upon which Mr. Untwalia relied is a Bombay case, -- Commissioner of Income-tax V/s. Ekbal & Co., AIR 1945 Bom 316 (C). The question at issue in this case also related to the interpretation of Sec.22(2), Income-tax Act, and it was held that a notice which was served upon the assessee requiring him to furnish a return of his income "within thirty days" of the receipt thereof will not be a valid notice within the meaning of this sub-section. None of there authorities is of any assistance to Mr. None of there authorities is of any assistance to Mr. Untwalia who appears on behalf of the assessee in the present case, for it is clear that the violation of the provisions with regard to time under Sec.22(2) was an illegality which vitiated the notice as a whole and no question arose as to the severability of the legal from illegal portion of the notice. The question in the present case is whether a notice under Sec.22 (4) with respect to the years 1349 to 1352 is severable from the portion of the notice relating to the year 1348 fasli and for the reasons we have already expressed we hold tnat the illegal portion of the notice a,s regards the year 1348 lash is clearly severable from the notice from the years 1349 to 1352 fasli which is admittedly legal . Mr. Untwalia also referred to -- Sankaralinga V/s. Commr. of Income Tax, AIR 1930 Mad 209 (PB) (D) and referred to an observation of the Special Bench at page 216 that the Income-tax Officer, cannot call for the production of books beyond the period specified in the proviso to Sec.22 and then drew an adverse inference for the purpose of penal assessment. But this observation must be read in the background of the material facts which arose in that case. It appears that the assessment year was 1926-27 and the accounting year was 1925-26 and the Income-tax Officer had issued a notice under Sec.22(4) asking the assessee to produce the accounts from 1917-20. The assessee could not produce the account books and his explanation was that the books were lost. It is clear that the notice issued by the Income-tax Officer under Sec.22(4) in that case was illegal as a whole for the Income-tax Officer was prohibited under the proviso to call for account books of any of the four years 1917-20. We do not think that this decision has any bearing on the question we have to investigate in the present case. 4. For the reasons we have already given we hold that the Income-tax Officer could validly make assessment in this case under Sec.23(4), Income-tax Act, and the assessment made upon the assessee for the year 1946-47 under Section 23(4) must be held to be perfectly legal. We accordingly answer the question against the assessee and in favour of the Income-tax Department. For the reasons we have already given we hold that the Income-tax Officer could validly make assessment in this case under Sec.23(4), Income-tax Act, and the assessment made upon the assessee for the year 1946-47 under Section 23(4) must be held to be perfectly legal. We accordingly answer the question against the assessee and in favour of the Income-tax Department. The assessee must pay the cost of this reference. Hearing fee Rs. 250.