S.S.GADGIL, INCOME-TAX OFFICER, BOMBAY versus LAL AND COMPANY

State of Madra1 v. C. 1. Coelho Sikri 1.

1964 April, 30.

amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation is viewed as an integrated whole, is so closely related to the plantation that the expenditure can be said to be laid out or expended wholly and exclusively for the purpose of the plantation. In this connection, it is perti-nent to note that what the Act purports to .tax is agricul-tural income and not agricultural receipts. from the agri-cultural receipts must be deducted all expenses which in ordinary conunercial accounting must. be debited against the receipts. There is nothing in the Act which prohibits such expenses from being deducted. No farmer would treat interest paid on capital borrowed for the purchase of the plantation as anything but expenses, and as long as the deductions he claims, apart from any statutory prohi-bition, can be fairly said to lead to the determination of the true net agricultural income, these must be allowed under the Act. In principle, we do not. see any distinction between interest paid on. capital borrowed for the acquisi-tion of plantation and that between interest paid on capi-tal borrowed for the purpose of running an existing planta-tion; both are for the purposes of the plantation.

In the result, we agree with the High Court that the

deduction claimed by the assessee fell within the scope of s. 5 ( e) of the Act, and that the whole of Rs. 22,628-9-8 and not merely Rs 1,570-10-7 sho_uld have been deducted from his assessable income. The appeal fails and is dis-missed with costs.

Appeal dismissed.

S. S. GADGIL, INCOME-TAX OFFICER, BOMBAY

LAL AND COMPANY

(K. SUBBA RAo, J. c. SHAH AND s. M. S!KRr, JJ.)

Jnconu Tax-Assessment as agent of non-resident party-Time limit for issuing notice-Scope of amending statute extending time '\

limit-Validity of notice-Indian Income-tax A.ct 1922 (11 of 1922). 1. 34(1)(b)(iii) proviso.

The appellant company was carrying on business in Bombay as commission agents. In the course of assessment proceedings for the year 1954-551 the Income-tax Officer noticed from the assessee"s books of account tnat the assessee had business connections with certain non-resident parties and found that the transactions disclosed that through the assessee those non-resident parties were receiving income, profits and gains. He considered that s. 43 of the Indian Income-tax Act, 1922, was applicable to the assessee and issued on March 27, 1957, notice under s. 34 of the Act for assessment of the assessee as an agent of the said non-resident parties. The assessee pleaded, inter alia, that the proceedings intiated by the Income-tax Officer under s. 34 were barred since the notice issued by him was after the expiry of one year from the end of the assessment year 1954·55, but the Income.tax Officer rejected the contention relyin'g on the amendment made to the proviso to s. 34(1)(b)(iii) by the Finance Act, 1956, under which the period of one year was changed to two years. The amendment was given retrospective operation upto April 1, 1956, but since the power to issue notice under the unamended Act had come to an end on Marcil 31, 1956, the question was whether the Income·tax Officer could issue notice of assessment to person as an agent of non.resident party under the amended provision when the period prescribed for such notice had before the amended Act came into force expired.

HELD: The proceedings initiated by the Income·tax Officer by the notice dated March 27, 1957, were barred; the authority of the Income-tax Ofticer under the Indian Income·tax Act before it was amended by the Finance Act of 1956 having come to an end, the amending provision would not entitle him to commence proceeding even though at the date when he issued the notJce it was within the period provided by the amendment.

Notwithstanding the fa('t that there was no determinable point of time between the expiry of the time provided under the old Act and the commencement of the An1tndn1ent Act, in the absence of an express provision or clear implication, the legislature could not be said to have intended to attribute to the Amending provision greater retros· pectivity than was expressly n1entioned.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 322 of 1963.

Appeal from the Judgment and order dated April l, 1958 of the fonner Bombay High Court in Miscellaneous Application No. 327 of 1957.

K. N. Rajagopala Sastry and R. N. Sachthey, for the appellant.

S. S. Gadgil v. Lal and Co.

Bishan Narain, S. P. Mehta, J. B. Dadachanji, 0. C. Mathur and Ravi11der Narain, for the• respondent.

s. s. Gadgil V. Lal and Co. Shah J.

April 30, 1964. The Judgment of the Court was delivered by

SHAH, J .-Ml s Lal and Company hereinafter called the assessee carry on business in Bombay as commission agents. In the course of assessment proceedings for the year 1954-55 the assessee's books of account were examined by the Income-tax Officer and it was noticed that the assessee had business connections with certain non-resident parties. On M1rch, 12, 1957, the Income-tax Officer issued notice calli:Jg upon the assessee to show caus0 why in respect of the assessment year 1954-55 the asscssee should not be treat-ed under s. 43 of the Indian Income-tax Act, 1922, as an agent in respect of twenty-five non-resident parties named in the notice. The assessee denied that he had "direct deal-ings" with any non-resident party and that in any event the proposed action was barred because the period prescrib-ed for initiation of proceeding had expired, and ' requested the Income-tax Officer to drop the proceeding. The Income-tax Officer B-III Ward, Bombay issued on March 27, 1957, notice under s. 34 of the Indian Income-tax Act for assessment of the assessee as .an agent of the twenty-five named non-resident parties. The assessee submitted return showing his- income as "nil''. The Income-tax Officer held that the transactions disclosed from the books of account -of the assessee clearly showed that the assessee "had regular business connection with'' non-resident parties, that through the assessee those non-resident parties were receiving income, profits and gains, and s. 43 was clearly applicable to the assessee there being definite business connection between the assessee and the named non-residents. He therefore treated the assessee as agent of the non-resident parties, under s. 43 of the Act.

The Income-tax Officer also rejected the contention of the assessee that action under s. 34 was barred at the date of the notice issued to the assessee. Relying upon the first proviso to s. 34(l)(b)(iii) inserted by the Finance Act, 1956, the Income-tax Officer held that the Legislature had

by amendment extended the "time-limit in clear and express terms so as to cover" action under s. 34 against person on whom the assessment or reassessment is to be made as an agent of non-resident person under s. 43 of the Act for the assessment year 1954-55, and accordingly assessed the income of the assessee at Rs. 60,684, estimating the income of the parties residing outside the tax.1ble territories, in the absence of accounts to be Rs. 50,000. The assessee then filed petition under Art. 226 of the Constitution in the High Court of Judicature at Bombay praying that writ in the nature of mandamus or prohibition do issue restraining and prohibiting the Income-tax Officer from giving effect to or taking any steps or pro-ceedings by way of recovery or otherwise in pursuance of the orders of assessment. The assessee plead-ed, inter alia, that the proceedings for assessment nnder s. 34 of the Act commenced by the Income-tax Officer after the expiry of one year from the end of the assessment year 1954-55 were without the authority of law. The High Court of Bombay, following its earlier judgment in S. C. Prashar v. Vosantsen Dwarkadas(') held that at the date when the notice was issued, by reason of the proviso which was in operation under s. 34 (1) in respect of the assessment year 1954-55 the notice was out of time and that the period pro-vided thereby could not be extended by the Finance Act of 1956 so as to authorise the Income-tax Officer to issue notice for assessment or reassessment of the assessce as statutory agent of party, residing outside \he taxable territory. In the view of the High Court the notice dated March 27, 1957, was invalid, and valid notice being condition precedent to the exercise of jurisdiction under s. 34, the proceeding under s. 34 was not maintainable. Against the order of the High Court issuing writs prayed for by the assessee, with certificate of fitness this appeal is preferred by the Income-tax Officer, Bombay.

In order to appreciate the contention raised by the assessee and which has found favour with the High Court, it is necessary to refer to the relevant provisions of s. 34.

(1) 29 I.T.R. 857

S. S. Gadgil v. Lal and Cc' Shah J.

S. S. Gadgil v. Lal and Co. Shah/.

as they stood before the section was amended by the Finance Act, 1956. The clauses relevant prescribing the period within which notice may be issued n:ad as follows:

"(l) (a) If -

he may in cases falling under clause (a) at any time within eight years and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, x x x notice containing all or any of the require-ments which may be included in notice under sub-section (2) of section 22 and may proceed to assess or re-assess such income, profits or gains or recompute the loss or depreciation allowance; x x x

Provided that-

(iii) Where the assessment made or to be made is an .assessment made or to be made on person deemed to be the agent of non-resident person under section 43, this sub-section shall have effect as if for the periods of eight years and four years period of one year was substituted."

By s. 18 of the Finance Act, 1956, s. 34 was extensively amended and cl. (iii) of the proviso was substituted by the following proviso:

"Provided further that the Income-tax Officer shall not issue notice under this sub-section for .any year after the expiry of two years from that year if the person on whom an assessment or re-assessment is to b1i made in pursuance of the notice is person deemed to be an agent of non-resident person under section 43."

Initially notice of assessment or re-assessment under s. 34 ( 1) against person deemed to be an agent of non-

8 S.C.R.

resident person under s. 43 could not be issued after the expiry of one year f!'.Om the end of the year of assessment: under the amended section this period was extended to two years from. the end of the relevant assessment year. In the course of assessment to income-tax for the year 1954-55 the relevant law applicable prescribed that notice of assessment or re-assessment .against person deemed to be an agent under s. 43 could not be issued after the expiry of one year from the .end of the assessment year. That period expired on March 31, 1956, and after that date no notice could be issued, relying upon the law as it stood before amendment for assessment or re-assessment treat-ing the assessee as an agent of non-resident under s. 43. But. the Income-tax Officer sought recourse to the amended provision which gave him period of two years from the end of the assessment year, for initiating assessment pro-ceedings, and the authority of the Income-tax· Officer to so act is challenged by the assessee.

Section 18 of the Finance Act, 1956, is, it is common

ground, not given retrospective operation before April 1. 1956. The question then is, whether the Income-tax Officer may issue notice of .assessment to person as an agent of non-resident party under the amended provision when the period prescn'bed for such notice had before the amended Act came into force expired? Indisputably the period for serving notice of re-assessment under the unamendro section had expired, and there was in the Act as it then stood, no provision for extending the period beyond the end of one year from the year of assess-ment. The Income-tax Officer -could therefore commence proceeding under s. 34 on March 27, 1957, only if the amended section applied and not otherwise. The amend-ing Act came into force after the period provided for the issue of notice under s. 34 before it was amended had expired. It is true that there was no determinable point of time between the expiry of the prescribed time within which the n<?tice could have been issued against the assessee under s. 34 proviso (iii) before it was amended. But there was no overlapping period either. Prima facie, on the expiry of the period prescribed by s. 34 as it original-ly stood, there was no scope for issuing notice unless tho

19~ -v.

S. S. Gadgik v. Lal and Co. Shah/.

S. S. Gadgil v. Lal and Co. Shah J:

Legislature expressly gave power to the Income-tax Officer to issue notice under the amended section notwithstanding the expiry of the period under the unamended provision or unless there was overlapping of the period within which notice could be issued under the old and the amended pro-vision. But counsel for the Commissioner submitted that at no time was the Income-tax Officer bereft of authority to issu.J notice under s. 34 of the Indian Income-tax Act, 1922. He submitted that till the mid-night of March 31, 1956, notice could be issued in exe:rcise of the powers con-ferred by s. 34 proviso (iii) before it was amended and notice of assessment or re-assessment could also be issued under the amended provision immediately thereafter in exercise of the powers conferred by s. 18 o! the Finance Act, 1956. Counsel relied upon the rule contained in s. 5 ( 3) of the General Clauses Act that unless the contrary is expressed, Central Act or Regulation shall be construed as coming into operation immediately on the expiration of the day preceding its commencement. It was submitted that this is merely statutory recognition of the rule which is well-settled that where ·Statute names date on which it shall come into operation. it shall be deemed to come into force immediately on the expi.ration of the previous day and the law does not take into consideration fractions of day.

Reliance was placed by counsel upon Tomlinson v. Bullock(') and English v. C/iff([2]). In Tom/inson's case ( [1]) the question was whether an order of affiliation could be made on an .1pplication made in respect of child born at any time of the day on August 10, 1872 under the Bastardy Act, 35 & 36 Viet. c. 65. In an application made for an order of affiliation, it was hel'd that the order could competently be made in respect of child born at any time of the day on the 10th of August. 1872, because the Act in the contemplation of law for this purpose came into effect from the commencement of the day on which it received the royal assent, and that normally an Act which comes into operation becomes Jaw as soon as it commences. Jn English v. Cliff(') it was held by the Court of Chancery

(2) (1914) 2 Ch. D. 37f.

(t) (1879) 4 Q.B.D. 230

that the trustees under deed of settlement dated May 13, l 964 1892, who stood possessed of ,an estate during the term of s. s. twenty-one years from the date of settlement upon trust Lal an/co . . -. to apply the rents and profits mentioned therein and who were authorised at the expiration of the said period to sell Shah /. the estate could competently sell it and their action was not liable to be challenged as infringing the rule of per-petuity. It was held in that case that the determination of the term of twenty-one years and the commencement of the trust for sale arising at one and the same tnoment, the trust was not void for remoteness on the gruund that it was limited to take effect at the expiration of the term. Neither -0f these cases has, in our judgment, any application to the principle applicable in the present case. The power to issue notice under the unamended Act came to an end on March 31, 1956. Under that Act no notice could thereafter be issued. It is true that by the amendment made by s. 18 of the Finance Act, 1956, notice could be issued within two years from the end of the year of assessment. But the application of the amended Act is subject to the principle that unless otherwise provided if the right to act under the earlier statute has come to an end, it co.uld no! be revived by the subsequent amendment which extended the period of limitation. The right to issue notice under the earlier Act came to an end before the new Act came into force. There was undoubtedly no determinable point -0f time between the expiry ot the earlier Act and the com-mencement of the new Act; but that would not, in our judgment, affect the application of this rule.s. s. Gadgil an/co . . -

Shah /.

Reliance was also" placed by counsel for the Commis-sioner upon the rule which has prevailed in the Supreme Court of the United States of America that "a new statute should be construed as colliinuation of the old one with the modifications contained in the new one, although it formally repeals the old stat\lte, when it re-enacts its sub-stantial provisions and the two statutes are almost identi-cal." Bear Lake & River Water W arks & Irrigation Com-pany and Jarvis-Conklin .Mortgage Trust Company v. Wil/~an:_ Garland and Corey Brothers & Co. ([1]). It appears (I) 164 U.$. I

JH# S. S. Gadgil v. Lal and Co. Shah J.

to have been recognised in the Supreme Court of the United states of America in Pacific Mail S. S. Co. v. Jolifee([1]) that repeal in terms of former statute does not necessarily indicate .an intention of the legislature thereby to impair right which had arisen under the act which was repealed. As the provisions of the new act took effect simultaneously with the repeal of the old one, the Supreme Court held that the new one might more properly be said to be substituted in the place of the old one, and to continue in force, with modifications, the provisions of the old act, instead of abrogating or annulling them and re-en.acting the same as new and original act. Apart from the question whether the rule so enunciated is applicable to the interpretation of Indian statutes, in this case we are not concerned with re-enactment of statute. The statute abrogates one rule of limitation, and enacts another rule with limited retros-pective operation. · To such case the rule enunciated by the Supreme Court of America, assuming it applies, attribut-ing to the Legislature an intention to continue in force the provisions of the old Act, with modification, so as to give to the new statute in substance operation retrospective-ly from the date on which the old statute was enacted, can have no application. We do not think that any such intention may be attributed to the Legislature in enacting s. 18 of the Finance Act, 1956 so as to make it the basis of liability to taxation after the expiry of the period pres-cribed in that behalf by the Legislaturn.

Counsel also submitted that s. 34 lays down rule of limitation for commencing an action for assessment or re-assessment, and that in the absence of an express provi-sion to the contrary, statute of limitation in operation at given time governs all proceedings from the moment of its enactment, even though the cause of action on which the proceeding was based came into existence before the Act was enacted. Equating proceeding under s. 34 of the Indian Income-tax Act with suit or proceeding in civil court, counsel said that the law of limitation being law of procedure, assessment proceedings including pro-ceedings for re-assessment are governed hy the law in force

(1) 69 U.S. (2 Wall) 459

8S.C.R.

at the date on which they are instituted, and that the rule that the repeal of statute without express words or clear implication in the repealing statute, cannot take away right vested in party acquired under the repealed statute when it was in force, is rule of prescription and not of procedure, and notwithstanding general observations to the contrary in certain decisions, applies only to those actions in which by . the determination of the period prescribed, right to institute an action for possession of property is extinguished. Counsel relies in support of the plea on Baleswar v. Latafat('). It is unneces'sary to dilate upon this argument in any detail, or to enter upon an analysis of the numerous cases which were mentioned at the Bar to determine whether the rule that without an express pro-vision, or clear implication arising from the amending statute rights acquired under the repealed statute by the determination of the period of limitation prescribed thereby cannot be deemed to be revived, applies to suits for posses-sion only. It may be sufficient to !Dake two comments on the .argument. The rule has in fact been applied to suits other than suits for possession: e.g. Mahomcd Mehdi Faya v. Sakinabai([2 ]) (a suit for restitution of conjugal rights); M. Krishnaswami Nalcker .v. A. Thiruven1wda Muddaliar(') (a suit for recovery of debt); Shambhoonath Saha v. Guruchurn Lahiri(') (an application for execu-tion); and Nepal Chandra Roy Chowdhury • v. Niroda Sundari Ghose(') (an application for setting aside an ex parte decree). Again soon after it was delivered the the authority of Baleswar's case(') was weakened by the judgment in Jagdish v. Saligram ([6 ]) where the Court doubt-ed the correctness of the earlier view.

proceeding for assessment is not suit for adjudication

of civil dispute. That an income-tax proceeding is in the nature of judicial proceeding between contesting parties, is matter which is not cap;tble of even plausible argument. The Income-tax authorities who have power to assess and recover tax are not acting as judges decidi!!g

(1) I.LR. 24 Pat. 249

(2) l.L.R. 37 Born. 383

(4) J.L.R. s Cal. 894

(3) A.I.R. (1935) Mad. 245

(S) I.L.R. 39 Cal. 506

(6) I.L.R. 24 Pat. 391

51 S.C.-6.

S. S. Gadgil

Lal ond Co. Shall J.

S. S Gadgil v. Lal and Co. Sltllh /.

litigation between the citizen and the States: they are administrative authorities whose proceedings are regulated by statute, but whose function is to estimate the income of the taxpayer and to assess him to tax on the basis of that estimate. Tax legislation necessitates the setting up of machinery to ascertain the taxable income, and to assess tax on the income, but that does not impress the proceeding with the character of an action between the citizen and the State: The Commissioner of Inland Revenue v. Sneath('); and Shell Company of Australia Ltd. v. Federal Commis-sioner of Taxation([2]).Again the period prescribed by s. 34 for assessment or re-assessment is not period of limitation. The section in terms imposes fetter upon the power of the Income-tax Officer to bring to tax escaped income. It prescribes different periods in different classes of cases for enforce-ment of the right of the State to recover tax. It was observ-ed by this Court in Ahmedabad Manufacturing and Calico Printing Co. Ltd. v. S. C. Mehta. Income-tax Officer and another('): · "It must be remembered that if the Income-tax Act prescribes period during which tax due in any particular assessment year may be assess-ed, then on the expiry of that period the depart-ment cannot make an assessment. Where no period is prescribed the assessment can be completed at any time but once completed it is final. Once final assessment has been made, it can only be reopened to rectify mistake apparent from the record (s. 35) or to reassess where there has been an escapement of assessment of income for one reason or another. (s. 34). Both these sections which enable reopening of back assessments provide their own periods of time for action but all these periods of time, whether for the first assessment or for rectification, or for reasaea!-ment, merely create bar when that time passed

·~···-·---

(1) 17 T.C. 149, 164 (2) (1931] A.C. 275 (3) (1963] Supp. 2 S.C.R. 92,u7-n8

against the machinery set up by the Income-tax Act for the assessment and levy of the tax. They do not create an exemption in favour of the assessee or grant an absolution on the expiry of the period. The liability is not enforceable but the tax may again become exigible if the bar is removed and the taxpayer is brought within the jurisdiction of the said machinery by reason of new power. This is, of course, subject to the condition that the law must say that such is the jurisdiction, either expressly or by clear implication. If the language of the law has that clear meaning, it must be given that effect and where the language expressly so declares or clearly implies it, the retrospective operation is not controlled by the commencement clause."

.Counsel for the Commissioner sought to derive some support from Income-tax Officer, Companies District I, Cal-cutta and another v. Calcutta Discount Company Ltd.([1]) in which Chakravartti C.J., dealing with the effect of the Income-tax and Business Profits Tax (Amendment) Act, 1948, observed:

"The plain effect of the substitution. of the new s: 34 with effect from 30th March, 1948 is ihat from that dat$1 the Income-tax Act is to be re.ad as including the new section as part thereof and if it is to be so read, the further effect of the express language of the section is that so far as cases coming within cl. (a) of sub-s. ( 1) are concerned all assessment years ending within eight years ftom 3Qth March, 1948 and from subsequent dates, are within its purview and it will apply to them, provided the notice con-templated is given within such eight years. What is not within the purview of the section is an assessment year which ended before eight years from 30th March, 1948.

1964 ...

S. S. Gadgil

Lol and Co.

Shala J.

But it may be recalled that the amending Act of 1948 with which the Court was concerned in Calcutta Discount Com-pany's case(') came into force on September 8, 1948, but s. 1 (2) prescribed that the amendment in s. 34 of the Income-tax Act, 1922, shall be deemed to have come into force on March 30, 1948, and the period under the un-amended section within which notice could be issued under ~. 34 ( 3) against the assessee company ended on March 31, 1951. Before that date the amending Act came into operation, and at no time h.ad the right to re-assess become barred. In considering whether the amended statute applies, the question is one of interpretation i.e., to ascertain whether it was the intention of the Legislature to deprive taxpayer of the plea that action for assessment or re-assessment could not be commenced, on the ground th.at before the amending Act became effective, it was barred. Therefore the view that even when the right to assess or re-assess has lapsed on account of the expiry of the pe'riod of limitation prescribed under the earlier statute, the Income-tax Officer can exercise his powers to assess or re-assess under the amending statute which gives an extended period of limitation, was not accept-ed in Calcutta Discount Company's case('). As we have already pointed out, the right to commence proceeding for assessment against the assessee as an agent of non-resident party under· the Income-tax Act before it was amended, ended on March 31, 1956. It is true that under the amending Act by s. 18 of the Finance Act, 1956, authority was conferred upon the Income-tax Officer to assess person as an agent of foreign party under s. 43 within two years from the end of the year of assessment. But authoriiy of the Income-tax Officer under the Act before it was amended by, the Finance Act of 1956 having already come to an end, the amending provision will not assist him to commence proceeding even though at the date when he issued the notice it is within the period provided by that amending Act. This will be so, notwithstanding the fact that there has been no determinable point of time between the expiry of the time provided under the old ·Act .and the

(1) 23 I.T.R. 471,

8 S.C.R.

commencement of the amending Act. The Legislature has given to s. 18 of the Finance Act, 1956, only limited retrospective operation i.e., upto April 1, 1956, only. That provision must be read subject to the rule that in the absence of an express provision or clear implication, the Legislature does not intend to attribute to the amending provision greater retrospectivity than is exrressiy mentioned, nor to authorise the Income•tax Officer to commence proceedings which before the new Act came into force had by the expiry of the period provided, become barred. The appeal fails and is dismissed with costs.

Appeal dismissed.

Lal orul Co. Y. s. s. Gadill Sltah J.

COMMISSIONER OF INCOME-TAX, U.P., LUCKNOW

KANPUR COAL SYNDICATE

(K. SUBBA RAO, J. C. SHAH AND S. M. S!KRI, JJ.)

Income Tax-Assessment on Association of persons or on members indi· vidually-Option to appropriate authority-Right of appeal, whether such assessee has--Powers of Tribunal and Appellate Assistanl Commissioner in Appeal-Income-tax Act, 1922 (11 of 1922), n. 3, 14(2) (b) 30, 31 and 33.

1964 April, 30.

Income-tax was assessed upon the total income in the hands of tho respondent-assessee, an association of several persons combined to-gether for the purpose of purchase of coal and its supply to customers for domestic purposes and other small scale industries. The assesseo claimed that it should not be assessed to tax as an association of persons, but the proportion of the income in the hands of each members of the association might be assessed to tax instead. The Income-tax Officer refused this request and an appeal to the Appellate Assistant Commis-sioner was dismissed. The Income-tax Appellate Tribunal, on further appeal. held that though the Income-tax Officer had power to assess income of the association of persons as such or in the altematiye on the individual members thereof in respect of their proportionate sharo fn the income, the tribunal had no power under the Act to direct tho Income-tax Officer to exercise his power in one way or other. On