1971 (1) TMI 20 - HC - Income Tax

Court Invalidates Tax Action Against Assessee, Deems Proviso Ultra Vires

Commissioner of Income-Tax, Poona Versus Sunderlal N. Daga.

Commissioner of Income-Tax, Poona Versus Sunderlal N. Daga. - [1971] 81 ITR 52 Issues Involved:1. Legality and validity of the initiation of action under section 34(1)(b) read with the second proviso to section 34(3) for the assessment years 1949-50, 1950-51, 1952-53, and 1953-54.2. Interpretation and application of section 34(1)(b) and the second proviso to section 34(3) of the Income-tax Act, 1922.3. Validity and constitutional aspects of the second proviso to section 34(3) concerning 'any person' other than the assessee.4. Whether the assessee was an 'intimately connected person' in the assessment proceedings against his mother, Sodradevi.Issue-wise Detailed Analysis:1. Legality and Validity of Initiation of Action:The main question referred to the court was whether the initiation of action under section 34(1)(b) read with the second proviso to section 34(3) against the assessee for the assessment years 1949-50, 1950-51, 1952-53, and 1953-54 by the Income-tax Officer by notice dated October 4, 1960, was legal and valid. The court held that the initiation of action was not legal and valid.2. Interpretation and Application of Section 34(1)(b) and the Second Proviso to Section 34(3):Section 34(1)(b) allows the Income-tax Officer to assess income that has escaped assessment if he has reason to believe that income, profits, and gains chargeable to income-tax have escaped assessment. However, a bar of limitation is imposed, and no such notice can be issued beyond four years from the end of that year. The second proviso to section 34(3) lifts this bar of limitation when the assessment or reassessment is in consequence of or to give effect to any finding or direction contained in an order under specified sections. The court found that there was no clear finding or direction in the Tribunal's order for the year 1949-50 that would attract the second proviso to section 34(3).3. Validity and Constitutional Aspects of the Second Proviso to Section 34(3):The court discussed the constitutional validity of the second proviso to section 34(3) concerning 'any person' other than the assessee. It was held that the second proviso is ultra vires and violative of Article 14 of the Constitution to the extent it applies to persons other than the assessee. The court cited several precedents, including the Supreme Court decisions in S. C. Prashar v. Vasantsen Dwarkadas and Commissioner of Income-tax v. Sardar Lakhmir Singh, which held that the second proviso is valid only concerning the assessee and not other persons.4. Whether the Assessee was an 'Intimately Connected Person':For the assessment years 1950-51, 1952-53, and 1953-54, the Appellate Assistant Commissioner had given a direction to assess the present assessee separately. The court examined whether the present assessee, Sunderlal Daga, was an 'intimately connected person' in the assessment proceedings against his mother, Sodradevi. The court concluded that the present assessee was not intimately connected with the assessment of Sodradevi and was a total stranger to those proceedings. Therefore, the bar of limitation was not lifted, and the initiation of proceedings against the assessee was beyond the prescribed period of limitation and hence invalid.Conclusion:The court answered the question in the negative, holding that the initiation of action under section 34(1)(b) read with the second proviso to section 34(3) against the assessee for the assessment years 1949-50, 1950-51, 1952-53, and 1953-54 by the Income-tax Officer by notice dated October 4, 1960, was not legal and valid. The Commissioner of Income-tax, Poona, was ordered to pay the costs of the reference.