RAVINDER NARAIN,BISHAN NARAIN v. COMM. I. T. — 1974 DIGILAW 98 (DEL)

B. C. Misra ( 1 ) THIS judgment will dispose of C. W. 387-D/63 and C. W. 388-D/63, former has been filed by Ravinder Narain and latter by Bishan Narain and Sham Narain. These raise common questions of law and fact. The material facts are taken from second writ petition. ( 2 ) IT appears that there was an agricultural land situated in Mauza Malikpur Chaoni on the Grand Trunk Road, Delhi. Nine persons had separate defined shares in them. On 22nd July, 1949, they entered into an agreement with Delhi Land and Finance Limited for the purpose of development and parcelling out of the land in plots and sale as a residential colony. Delhi Land and Finance Limited were appointed as their sole selling agents and a power of attorney was given to them. One of the terms of the agreement was that the company would get 50 per cent of the net realisations while the other 50 per cent would be given to the respective nine owners of the land in accordance with their shares in the land. It may be noticed that all the aforesaid nine. members do not belong to the same family. ( 3 ) DURING the assessment year 1953-54, Shri Suraj Narain, father of the petitioners in the second writ petition, filed a return of his total income in which he appended a note to the effect that he owned some lands and garden in the area in dispute inherited as, ancestral property which were not taxable and some of those lands had been sold during the current year. A certificate had been filed from Delhi Land and Finance Limited (hereinafter referred to as the Finance Company) showing that a sum of Rs. 28,82811-9 had been received by Shri Suraj Narain during that year. The Income-Tax Officer concerned by his order dated 26th August, 1953 held that, during the accounting year, the assessee had sold some of his ancestral agricultural land for, which he had received the amount mentioned as part payment and it was stated that the sale had been entrusted to the Finance Company which had paid the assessee the said amount. He noticed the submission of the assessee that he had merely converted his possession into cash which did not amount to business activity. He noticed the submission of the assessee that he had merely converted his possession into cash which did not amount to business activity. The Income-Tax Officer, under the circumstances, accepted the explanation and held that the said income was not a revenue receipt, but was of the nature of non-business or for that matter a capital gain. The finding of the Income-Tax Officer is contained only in the case of the assessment of Shri Suraj Narain, who was the predecessor of the petitioners in the second petition. It is obvious that at that time the Income Tax Officer did not propose to assess any association of persons constituted by the nine or ten persons mentioned above. The parties received further incomes on account of sale of lands from the Finance Company in subsequent years. On 26th March, 1963, the Income-Tax Officer issued two sets of notices for each of the four assessment years, namely 1954-55 and 1958-59, 1959-60 and 1960-61. proposing to assess the escaped income. The first set of notices was issued to the nine owners of the land or their legal representatives as land-owners besides the Finance Company. The second set of notices was issued to them with he addition of the name of the Finance Company. These are the notices which have been challenged in the present writ petitions. ( 4 ) THE writ petitions were filed in the High Court on or about 23rd May, 1963 and they were dismissed in limine by order of the High Court dated 24th May, 1963. Aggrieved by this order, the petitioners filed appeals in the Supreme Court which were allowed and petitions were remanded for decision according to law. (In para 5, pedigreetable of petitioners is given ). ( 5 ) NINE persons have been sought to be assessed on business arising out of sale of land and the income received therefrom during the four assessment years mentioned above. The petitioners have challenged the said notices in the two writ petitions and have contended that there was no business activity but only conversion of the capital and there was no income in the nature of revenue receipt and that the orderpassed in the case of Suraj Narain was final. The petitioners have challenged the said notices in the two writ petitions and have contended that there was no business activity but only conversion of the capital and there was no income in the nature of revenue receipt and that the orderpassed in the case of Suraj Narain was final. They have also contended that they never formed any association of persona to carry on any business and, at all events, the Income-Tax Officer had exercised his option to assess the parties individually. They also allege that full facts had been disclosed to the Income-Tax Officer in connection with the assessments and there was no valid and legal ground to issue notices under section 148 of the Income-Tax Act and the notices are consequently legally bad. ( 6 ) RESPONDENTS contended that they wish to assess the nine parties or the same together with the Finance Company as an association of persons which had carried on the venture in the nature of development and sale of the land and that the information had been received on close examination of the agreement executed between the parties and that the notices were perfectly legal and valid. It is suggested that the association had not been assessed previously and on its assessment, every member of it would be liable to tax on the profits of the association as a whole. ( 7 ) IT may be mentioned at the outset Revenue has not filed the report of the Inome-Tax Officer made to the Commissioner of Income- Tax and the Central Board of Revenue sanctioning action under section 147 of the Income Tax Act. The ground was that the relevent papers were not available. We are, therefore, left with the meagre material placed on the record. The relevant portion of the first set of the notice is :- (. . .) ( 8 ) ASSOCIATION of persons means an Association in which two or more persons join with a common purpose with the object to produce income, profits or gains. It is significant that in the notice the expression association of Persons" is not used for the assessee and in paragraph 2, the return is invited of "your income" and the alternative column "the income of * * in respect of which you are assessable" is blank and would be presumed to be scored out. It is significant that in the notice the expression association of Persons" is not used for the assessee and in paragraph 2, the return is invited of "your income" and the alternative column "the income of * * in respect of which you are assessable" is blank and would be presumed to be scored out. It is obvious that there is no indication or mention in this notice whatsoever of any association of persons formed to carry on the business which was sought to be assessed. The notices have been sent to each one of the ten parties mentioned therein. There is nothing else in the notice to indicate that the assessees were required to file a return in respect of income of the business of the purchase and sale of land described above. By a perusal of the said notice, it would be impossible for any of the parties (except by intuition or by a fresh reference to the income- tax office concerned) to divine that these notices were not intended to deal with the income of the said persons only but to an association, a different assessee, which was supposed to have been formed by these persons by an agreement of July, 1949 or otherwise. Notices in respect of the other assessment years in dispute are in precisely the samelanguage and are subject to the same comments. ( 9 ) SECTION 147 of the Act prescribes that if the Income-Tax Officer has reason to believe that, by reason of the omission or failure on the pan of an assessee to make a return under section 139 for any assessment year to the Income-Tax Officer, or to disclose fully and truly all material tacts necessary for his assessment for that year, income chargeable to tax has escaped assessment * * he may, subject to the provisions of sections 148 to 153, assess or reassess such income for the assessment year concerned. Section 148 prescribes that before making the assessment, reassessment or recomputation under section 147, the Income-Tax Officer shall 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 139 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 and the Income-Tax Officer shall, before issuing any notice under this section, record his reasons for doing so. ( 10 ) THE Supreme Court in Narayana Chetty and another Vs. Income-Tax Officer, Nellore and others, (1959) 35 Income Tax Reports 388 held on page 392 that the notice prescribed by section 34 of the Act of 1922 for the purpose of initiating re-assessment proceedings, was not a mere procedural requirement, but the service of the prescribed notice on the assessee was a condition precedent to the validity of any re-assessment made under section 34 and if no notice is issued or if the notice issued is shown to be invalid, then the proceedings taken by the Income Tax Officer without a notice or in pursuance of an invalid notice would be illegal and void. This authority has subsequently been followed and the rule of law laid down therein has been reiterated in Calcutta Discount Company Ltd. Vs. Income-Tax Officer. 41 Income Tax Reports 191, Commissioner of Income-Tax Vs. A. Raman and Co. 67 Income Tax Reports 11, Chhugamal Rajpal Vs S. P. Chaliha, 79 Income Tax Reports 603 and Sheo Nath Singh Vs. Appellate Assistant Commissioner of Income Tax, 82 I. T. R. 147. ( 11 ) IN Commissioner of Income-Tax. Andhra Pradesh vs. K. Adinarayana Murty, (1967) 6.) Income Tax Reports 607, the material fact was that the correct status of the assessee was that of Hindu Undivided Family, but the first notice under section 34 of the act had been issued to the assessee as an individual for making assessment in that status and it was, therefore, manifest that the proceedings taken under that notice were illegal and without jurisdiction. In this connection, the Supreme Court observed : - "under the scheme of the Income-tax Act the individual and the hindu undivided family are treated as separate units of assessment and if a notice under section 34 of the Act is wrongly issued to the assessee in the status of an individual and not in the correct status of an hindu undivided family the notice is illegel and all proceedings taken under that notice are ultra-vires and without jurisdiction," And that even the submission of the return will not validate the illegality of the notice and the proceedings. ( 12 ) IN Prabhudas Jagjivandas and other vs. Income-Tax Officer, (1966) 55 Income Tax Reports 1, it held that when a firm is assessed as an unregistered firm in the original assessment proceedings, the notice under section 34 (1) (a) must be issued against an individual partner or partners of the firm cannot form a foundation for initiating proceedings for reassessment of the income, profits and gains of the firm and the fact that the firm had been dissolved did not make any difference. In this decision, the Division Bench agreed with the view of a Division Bench of the High Court of Calcutta in Bose vs. Manindra Goswami, (1958) 33 Income Tax Reports 435, where it was held that if it was intended that the notice should be on the firm, served on a partner, it should at least have been made clear in the body of the notice that what in the Income-Tax Officer s view, had escaped assessment was the income of the whole firm and not the income of an individual partner and that the return called for a return of the total and world income of the firm and not the income of the individual partner. In Marghabhai Rabarbhai Patel vs. B. M. Parikh Income-Tax Officer, (1970) 78 Income Tax Reports 418, Bench held that if a notice under section 34 were issued against a person as a a legal representative of a deceased person for making re-assessment of the income of the deceased as an individual, the notice could not be availed of for the purpose of taking proceedings for reassessment of the income of the Hindu undivided family and the fact whether the notice had been issued to the undivided family or to the individual would be plainly a question of construction which would have to be determined on a proper interpretation of the language of the impguned notice and the intention of the revenue would hardly be relevant in determining this question. The impugned notices addressed to the petitioner as legal representative of late Patel left no doubt that the impugned notices were issued to the petitioner as legal representative of the deceased and the income which was sought to be assessed was the income of the deceased as an individual and the proceedings could not be continued against the Hindu Undivided family. In this decision, the Court observed that the notice under section 34 was not merely a procedural requirment and it was the foundation of the jurisdiction of the Income-Tax Officer and if the impugned notices could not be said to be notices to the Hindu undivided family of the deceased, the revenue could not proceed to reassess the income of the Hindu undivided family of the deceased relying on them. ( 13 ) THE aforesaid authorities lay down a rule of law that notice under section 148 must be issued and addressed in the name of and must be served in accordance with law on the assessee himself who is sought to be assessed or reassessed and is called upon to file a return. In the instant case, there is nothing to indicate in the impugned notices that any association ofpersons was sought to be assessed or was called upon to file a return Notices were addressed to the individuals Although the names of all the persons were mentioned, still their copies were sent and served on each one of them, yet there was nothing to indicate that they were intended to relate to the assessee as the association of persons which is distinct from an individual assessee. In the counter-affidavit it has been asserted that there were two associations of persons, one formed by nine co-owners of the land and the second by them together with the Finance Company. This again shows the weakness of the stand of the Revenue inasmuch as they were not sure of the existence or the status of one or two associations and they were only proceeding to assess the individuals for the income received by them and not any association of persons. Had it been intended to proceed against the association, not only notices would have been addressed to the association but its business activity, which was sought to be assessed, would certainly have beee indicated Further, if it is correct that the association had come into existence during the assessment year 1954-55 or earlier, and had been functioning and carrying on business. there is no reason why the notices had not been issued for the entire period from 1st April, P54 to 31st March, 1961. The individuals had apparently received amounts from the Finance Company during 1954-55 and for three years from 1st April, 1958 to 31st March, 1961 and they had not received any income during the intervening three years from 1955 to 1958. This also points to the fact that notices were addressed only to the individuals in respect of the amounts received by them. There is nothing to indicate in the notices that they we;e addressed to or were intended for any association of persons ( 14 ) THE Supreme Court in deciding the appeals of the petitioners against dismissal of the present writ petitions in limine has quoted one of the notices in extenso and observed : We have reproduced one notice above and we cannot find anything in that notice to come to the conclusion that the Income-Tax Officer was really attempting to assess an association of persons. " ( 15 ) THESE observations of the Supreme Court fully support the view I am taking of the notices. I, therefore, hold that the impugned notices are not directed against any association of persons alleged to have been formed by the petitioners. They are, however, addressed to the individuals. As such the Income Tax officer, in pursuance of the said notice, cannot proceed to assess any association of persons, but there is nothing to prevent him from proceeding against the parties in their individual capacity. They are, however, addressed to the individuals. As such the Income Tax officer, in pursuance of the said notice, cannot proceed to assess any association of persons, but there is nothing to prevent him from proceeding against the parties in their individual capacity. ( 16 ) MR. Manchanda has further argued in the alternative that assuming that an association of persons existed, the department had exercised its option to assess the individuals. This is borne out by the assessment order passed by the Income-Tax Officer on 26th August 1953 in the case of Shri Suraj Narain. The order indicates that Suraj Narain had one/16th share in the land and that he had inherited the land from his ancestors some of the land bad been entrusted to the Finance Company which had paid the assesse a Rs. 28,828-11-9 during the accounting year. In response to the notice under section 23 (3) of the Act of 1922, the assessee had filed a letter dated 5th August, 1953 narrating the history of the land to show that the land was ancestral and that he had merely converted his possession into cash and had not indulged in any business activity. In this case, the Income-Tax Officer came to the conclusion that it was a non-business report which conclusion was perhaps legally wrong, but no appeal against the same appears to have been filed. It has been suggested at the bar that the plea of discovering an association of persons as distinct from the indvidual owners and the fresh method to assess the same has been invented by the department to get over this inconvenient finding of the Income-Tax Officer in the case of Suraj Narain which has become final. Be that as it may the order does indicate that the Income-Tax Officer had proposed to assess Suraj Narain in his individual capacity in respect of the same income which is being attributed to the association. It is, therefore, clear that the Income-Tax Officer had exercised his option. Support for this submission is also sought tobe found by the learned counsel for the petitioner by reference to the orders of the Income Tax Officer in the case of Prakash Narain, son of Chand Narain deceased. It is, therefore, clear that the Income-Tax Officer had exercised his option. Support for this submission is also sought tobe found by the learned counsel for the petitioner by reference to the orders of the Income Tax Officer in the case of Prakash Narain, son of Chand Narain deceased. In this order, the income received by Chand Narain is also mentioned as of one of the co-ownersof the land from the sale of the land in dispute made by the Finance Company and others during the assessment year 1954-55. This would support the contention that the department has opted to assess the parties in respect of the income in dispute and has not thought it fit to proceed against the association. In Commissioner of Income Tax vs. Kanpur Coal Syndicate. 53, 1 T. R 22 , Joti Prasad Aggarwal vs. Income-Tax Officer. ( 959) 37 I. T. R. 107 and Commissioner of Income-Tax vs. Murlidhar Jandp. Ginning and Pressing Factory, 60 Income Tax Reports, 95, the principle has been approved that once the option to make an assessment against an individual has been exercised, the department cannot proceed to assess the association formed by him for the same income for the same years. Considered from any point of view, I am satisfied that the impugned notices are in law not directed against the association of persons but are intended only for the individuals. As a result, the writ petitions must succeed.