Settlement under the old income tax law did not bar rectification of unsustainable tax relief or reassessment of settled income.

A settlement under section 34(1B) of the Indian Income-tax Act, 1922 was treated as conclusive only for matters actually covered by it, and section 34(1D) barred reopening of those settled matters. On the facts, the sums derived from encashment of high denomination notes were held to form part of the income settled for assessment year 1947-48, so they could not be shifted to another year. Rectification of the earlier assessments was also sustained: because the original assessments arose under the repealed 1922 Act, the rectification had to be tested under the corresponding old-Act provision, and the later withdrawal of excess profits tax and business profits tax relief was not barred by the settlement.

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Issues: (i) Whether the sum of Rs. 2,98,000 and Rs. 1,27,000, derived from encashment of high denomination notes, could be assessed in assessment year 1947-48 in view of the settlement under section 34(1B) of the Indian Income-tax Act, 1922 and the bar in section 34(1D); (ii) whether the rectification orders withdrawing excess profits tax and business profits tax were valid, whether a competent appeal lay before the Appellate Assistant Commissioner, and whether section 34(1D) barred the Revenue from giving effect to the subsequent rectification.

Issue (i): Whether the sums of Rs. 2,98,000 and Rs. 1,27,000, derived from encashment of high denomination notes, could be assessed in assessment year 1947-48 in view of the settlement under section 34(1B) of the Indian Income-tax Act, 1922 and the bar in section 34(1D).

Analysis: The settlement order covered the escaped income of the assessees for the relevant years, including the amount relatable to the encashment of high denomination notes. The settlement specified the income assessable to tax and declared the settlement to be conclusive as to the matters stated therein. Section 34(1D) prohibited reopening of any matter forming part of the settlement in subsequent proceedings. On the facts, the amounts of Rs. 2,98,000 and Rs. 1,27,000 were treated as included in the settled income for assessment year 1947-48, and the assessees were therefore precluded from contending that the sums should be assessed in another year.

Conclusion: The amounts of Rs. 2,98,000 and Rs. 1,27,000 were rightly held assessable in assessment year 1947-48, and the contention to assess them in assessment year 1946-47 failed in favour of the Revenue.

Issue (ii): Whether the rectification orders withdrawing excess profits tax and business profits tax were valid, whether a competent appeal lay before the Appellate Assistant Commissioner, and whether section 34(1D) barred the Revenue from giving effect to the subsequent rectification.

Analysis: The original assessments had been made under the Indian Income-tax Act, 1922, and the rectification therefore had to be tested under section 35(6) of that Act, even though the Income-tax Officer had acted under section 155(3) of the Income-tax Act, 1961. The rectification provisions under section 35(6) and section 155(3) were treated as substantially similar, and the rectification order was deemed to be one under the old Act. On that footing, no appeal lay to the Appellate Assistant Commissioner against a rectification order under section 35(6), though the Tribunal could entertain the departmental appeal from the Appellate Assistant Commissioner's order because that order had been decided on merits. Section 34(1D) did not bar rectification, because the settlement did not immunise matters that were not truly fixed by it and the later finding that the income was not business income meant that the excess profits tax and business profits tax allowances were no longer legally sustainable.

Conclusion: The rectification orders were sustained, the appeal before the Appellate Assistant Commissioner was held incompetent, the Tribunal was held competent to entertain the departmental appeals, and section 34(1D) was held not to bar the Revenue.

Final Conclusion: The references were answered against the assessees and in favour of the Revenue, with the High Court affirming the assessability of the disputed sums in assessment year 1947-48 and upholding the Revenue's rectification actions.

Ratio Decidendi: Where an assessment was made under the repealed 1922 Act, rectification of that assessment must be treated as falling under the corresponding provisions of that Act, and a settlement under section 34(1B) does not bar rectification or reopening on matters not conclusively protected by the settlement.

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