1958 (10) TMI 10 - SC - Income Tax

Validity of Income-tax Proceedings Upheld; Notice Essential for Reassessment

The court upheld the validity of proceedings under section 34 of the Indian Income-tax Act, ruling that proper notice is a prerequisite for reassessment. ... Whether the proceedings taken under section 34 against each of the said firms were without jurisdiction and void? Held that:- When the notice is issued under section 34(1)(a) the Income-tax Officer proceeds to act on the ground that the income, profits and gains of the firm which are chargeable to income-tax have been underassessed ; it is the income of the firm which is initially ascertained in the assessment proceedings under section 23 and it is in respect of the said income of the firm that the Income-tax Officer finds that a part of it has escaped assessment. We do not, therefore, think that the appellant's argument that the notice issued against the firm and served on the appellant was invalid under section 34(1)(a) can be accepted. Rule 6B has been made to clarify this position and to confer on the Income-tax Officer in express and specific terms such authority to review his own decision in the matter of the registration of the firm when he discovers that his earlier decision proceeded on a wrong assumption about the existence of the firm. In our opinion, there is no difficulty in holding that rule 6B is obviously intended to carry out the purpose of the Act and since it is not inconsistent with any of the provisions of the Act its validity is not open to doubt. Rules 2 and 6 of the rules framed under section 59 of the Indian Income-tax Act are not ultra vires the rule-making authority. All that the appellants would be able to argue on this ground would be that the course adopted by the Income-tax Officer in making orders of fresh assessment is irregular and illogical and should be corrected. That is a matter concerning the merits of the orders of assessment and by no stretch of imagination can it be said to raise any question of jurisdiction under article 226. That is why we express no opinion on this point. Appeal dismissed. Issues Involved:1. Validity of proceedings under section 34 of the Indian Income-tax Act.2. Validity of cancellation of firm registration under rule 6B of the Income-tax Rules.3. Legality of assessing escaped income on the basis of unregistered firms while maintaining original assessments based on registered firms.Issue-wise Detailed Analysis:1. Validity of Proceedings under Section 34:The appellants contended that the proceedings under section 34 were without jurisdiction and void due to the lack of proper notice. The court examined the requirement under section 34(1)(a) which mandates that the Income-tax Officer must serve a notice on the assessee if he believes that income has been under-assessed due to the assessee's omission or failure to disclose material facts. The court agreed with the appellants, stating that the service of the requisite notice is a condition precedent to the validity of any reassessment under section 34. If no notice is issued or if the notice is invalid, the proceedings and consequent orders of reassessment are void. The court found that the notices were served on the appellant C. Pitchayya on behalf of the firms, and the notices specifically mentioned the under-assessment of income. However, the appellants argued that the notices should have been issued to individual partners rather than the firm. The court rejected this argument, clarifying that the firm is treated as an assessee under section 3 of the Act, and the notice to the firm was valid. The court also noted that the appellant had appeared before the Officer in response to the notice, and the other partners did not challenge the proceedings.2. Validity of Cancellation of Firm Registration under Rule 6B:The appellants argued that the cancellation of firm registration under rule 6B was ultra vires. Rule 6B allows the Income-tax Officer to cancel the registration if the firm is found to be fictitious. The court examined section 59 of the Act, which empowers the Central Board of Revenue to make rules for carrying out the purposes of the Act. The court held that rule 6B is consistent with the Act and is intended to clarify the Income-tax Officer's authority to cancel registration if it was erroneously granted to a non-existent firm. The court rejected the argument that cancellation of registration is only permissible under section 23(4) as a penalty for default. The court noted that section 23(4) deals with genuine firms that fail to comply with legal requirements, while rule 6B addresses cases where registration was granted to fictitious firms. The court also dismissed the argument that the lack of an appeal provision against cancellation under rule 6B invalidates the rule. The court emphasized that the appellants had notice and an opportunity to prove the genuineness of their firms, thus negating the claim of invalidity on procedural grounds.3. Legality of Assessing Escaped Income on the Basis of Unregistered Firms:The appellants contended that it was illegal to assess escaped income on the basis that the firms were unregistered while maintaining original assessments based on registered firms. The court did not delve into the merits of this argument, stating that it could be raised in the appeals against the fresh assessment orders. The court emphasized that this contention pertains to the merits of the assessment orders and does not raise any jurisdictional issues under article 226. The court suggested that the appellants could ventilate their grievances in the appeals or applications under section 27 of the Act.Conclusion:The court dismissed the appeals, upholding the High Court's decision on all points. The court agreed with the High Court that the proceedings under section 34 were valid, the cancellation of registration under rule 6B was lawful, and the appellants' contention regarding the assessment of escaped income did not raise jurisdictional issues suitable for writs of prohibition under article 226. The court also noted that the appellants had alternative remedies available through appeals and applications under section 27 of the Act. The appeals were dismissed with costs.