Limitation and jurisdiction in shareholder reassessment: appellate direction cannot validate a time-barred notice under section 34.

Reassessment of a shareholder under section 34 was time-barred because limitation had to be computed by reference to the shareholder's assessment year, not the date of the company's section 23A order. A notice issued after expiry of that period could not be validated by an Appellate Assistant Commissioner's direction where the direction rested on an erroneous legal basis and sought to confer jurisdiction that had not been lawfully acquired. The saving proviso to section 34(3) applies only to a lawful direction within appellate powers. The reassessment was therefore invalid and barred by limitation.

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Issues: Whether a reassessment of a shareholder under section 34 was valid when the notice was issued beyond the limitation period and the department relied on a direction of the Appellate Assistant Commissioner to sustain it.

Analysis: The deemed dividend in the shareholder's hands had to be related to the assessment year in which the company's profits accrued and remained undistributed, not to the date of the section 23A order. Limitation for reassessment therefore ran with reference to the shareholder's assessment year. A notice under section 34 issued after expiry of that period could not be saved by a direction of the appellate authority if the direction itself rested on an erroneous view of law and sought to confer jurisdiction where none had been lawfully acquired. The saving proviso to section 34(3) applies only to a lawful direction within the scope of appellate powers and cannot validate proceedings initiated without jurisdiction.

Conclusion: The reassessment was invalid and barred by limitation. The answer to the referred question was in the negative, in favour of the assessee.

Ratio Decidendi: A direction by an appellate authority cannot cure a reassessment that was initiated without jurisdiction or after the statutory period of limitation, and the saving proviso to section 34(3) applies only where the direction is itself lawful and within the appellate authority's powers.

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