Retrospective income-tax power upheld; statutory fiction sustained assessment jurisdiction, while penalty was void for violating judicial restraint.

A statutory fiction deeming Part B States to be taxable territories for the relevant previous year brought income accruing in Madhya Bharat during 1949-50 within the charging provisions of the Income-tax Act, 1922, and supported the Income-tax Officer, Indore's jurisdiction over related assessment matters. Parliament was also held competent to enact retrospective income-tax legislation for pre-26 January 1950 income. The notice under Section 22(2) was treated as valid because it was understood and acted upon, and no specific objection to the place of assessment was raised so Section 64(3) did not invalidate the assessment. A penalty order made in breach of a subsisting judicial restraint was void for want of jurisdiction.

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Issues: (i) whether income accruing in Madhya Bharat during the accounting year 1949-50 was chargeable to tax under the Income-tax Act, 1922 and whether the Income-tax Officer, Indore, had jurisdiction to assess income arising outside Madhya Bharat for the assessment year 1950-51; (ii) whether Parliament had power to impose income-tax retrospectively on income accruing in Madhya Bharat before 26 January 1950; (iii) whether the notice under Section 22(2) of the Income-tax Act, 1922 was invalid and whether the assessment failed for want of a proper objection as to the place of assessment under Section 64(3); and (iv) whether the penalty order under Section 46(1) was valid.

Issue (i): Whether income accruing in Madhya Bharat during the accounting year 1949-50 was chargeable to tax under the Income-tax Act, 1922 and whether the Income-tax Officer, Indore, had jurisdiction to assess income arising outside Madhya Bharat for the assessment year 1950-51.

Analysis: Sections 3 and 4 charge income by reference to the previous year, and the definition of "taxable territories" in Section 2(14A), read with its proviso, was construed as deeming Part B States to be taxable territories for the relevant previous year for the purpose of assessment. The legal fiction in the proviso was treated as sufficient to attract the charging sections. On that construction, income accruing in Madhya Bharat during 1 April 1949 to 31 March 1950 was chargeable under the Act. Independently, the proviso and Section 64 were held to confer jurisdiction on the Income-tax Officer, Indore, to assess the petitioners in respect of income arising outside Madhya Bharat in that year.

Conclusion: The income was chargeable under the Act and the Income-tax Officer, Indore, had jurisdiction to make the assessment.

Issue (ii): Whether Parliament had power to impose income-tax retrospectively on income accruing in Madhya Bharat before 26 January 1950.

Analysis: The contention based on the covenant and the old constitutional position was rejected. Parliament was held to possess plenary legislative power under the Constitution within its assigned field, including the power to make retrospective fiscal legislation. Article 372 was held not to preserve the earlier restrictions on legislative competence under the Government of India Act, 1935, so as to fetter Parliament in relation to Part B States.

Conclusion: Parliament had power to legislate so as to tax the relevant pre-26 January 1950 income.

Issue (iii): Whether the notice under Section 22(2) of the Income-tax Act, 1922 was invalid and whether the assessment failed for want of a proper objection as to the place of assessment under Section 64(3).

Analysis: The notice was treated as valid because it was understood by the assessee as requiring a return of the Hindu undivided family's income and was in fact acted upon by filing a return. The validity of assessment was also held not to depend on the technical validity of the notice. As to place of assessment, a mere return marked "under protest" and a denial of liability did not amount to a specific objection to the place of assessment. Since no live dispute on place of assessment was raised before the Income-tax Officer, Section 64(3) was held not to be attracted.

Conclusion: The notice was valid and the assessment did not fail for want of compliance with Section 64(3).

Issue (iv): Whether the penalty order under Section 46(1) was valid.

Analysis: The penalty was imposed after this Court had already passed a prohibitory order restraining enforcement action. The order was therefore treated as having been made without jurisdiction and in disregard of the subsisting restraint.

Conclusion: The penalty order was illegal and without jurisdiction.

Final Conclusion: The challenge to the provisional assessment and notice of demand failed, but the separate penalty order was struck down, so the relief granted was confined to that latter order.

Ratio Decidendi: A statutory fiction deeming a territory to be a taxable territory for a prior accounting period can attract the charging provisions of the Income-tax Act and confer assessment jurisdiction, while a penalty order made in violation of a subsisting judicial restraint is void for want of jurisdiction.

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