the Income-Tax Officer, Bangalore v. K. N. Guruswamy

Judgment

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 165-168 of 1956. :Appeals from the,judgment and order dated March 22, 1955, of the Mysore High Court in Wri~ Petitions • Nos. 20.to 22-and 25 of .1954. SUPREME ·cOURT REPORTS [1959) i95S H. N. Sanyal, Addl. Solicitor-General of India, R. Th• Income-tax Ganapathy Iyer and R. H. Dhebar, for the appellant. Officer; Bangalore A. V. Viswanatha Sastri, K. R. Choudhury and G. Gopalakrishnan, for the respondent. K. N. G·uruswatny 1958. April 28. The Judgment of the Court was delivered by s. I<. Das J. S. K. Das J.-These four appeals brought by the Income-tax Officer, Special Circle, Bangalore, on a certificate granted by the High Court of Mysore, are from the judgment and order of the said High Court dated March 22, 1955, by which it quashed certain proceedings initiated, and orders of assessment made, against the respondent assessee in the matter of reassessment of income-tax for the years 1945-46, 1946-47, 1947-48, and 1948-1949.

The relevant facts are these. The respondent , K. N. Guruswamy was carrying on business as an excise contractor in the Civil and Military Station of Bangalore, hereinafter called the retroceded area, in Mysore. He was assessed to income-tax for each of the four years mentioned above under the law then in force in the retroceded ·area by the Income-tax Officer having jurisdiction therein. For 1945-46 the original assessment was made on February 12, 1946, for 1946-47 on January 21, 1949, for 1947-48on January 22, 1949, and for 1948-49 also sometime in the year 1949. The tax so assessed was duly paid by the assessee. On January 5, 1954, more than four years after, the Income-tax Officer, Special Circle, Bangalore, served a notice on the assessee under s. 34 of the Indian· Income-tax Act, 1922, for the purpose of assessing . what was described as ' escaped ' or 'under-assessed ' ' income chargeable to income-tax for the said years.

The assessee• appeared through his auditors and contested the jurisdiction of the Income-tax Officer to issue the notice or make a re-assessment under s. 34 of the Indian Income-tax Act, 1922. On February 19, 1954, the Income-tax Officer overruled the asstJssee's objection, and made a re-assessment order for the • year 1945-46. On February 25, 1954, the assessee filed four wr_it petitions in the Mysore High Court in I S.C.R. St;J'PRE;ME COURT REPORTS which he challenged the ju:\isdiction of the Income-tax r958 Officer to take : proceedi~gs under s. 3~ or to make an The Income-tax order·of re-asse~sment m suqh proceedn;1gs; hl:l,.asked Officer, Ba.;galore for appropriate orders or writs quashing the pending proceedings for three ,years and the order of re-assesi;i;-1K. N. Guruswamy ment for 1945-46, During the. pendency of the cases in the High Court, the Income-tax Officer was permit- 5· K. Das f. ted to.make an assessment order for 1946-47, subject to 1 the conditiop. th.at if the· .a&sessee succeedeQ.: in establishing that the Income-tax .

Officer had ~·no jurisdiction, that order would. also be quashed., Th~ High Court heard all the four petitions together, and by its judgment and order dated March 22, 1955, allowed the writ petitions and ~ashed the proceedings in· assessment as ali;io the tw~ oraers of re-assessment, holdh1g that the. Income"'L1'.tf Ofµcer had no jurisdiction to ip.itiate the p:i;oceedings or to ma,ke the orders· of re-assessment. The High Court, however, granted a certificate that the cases were fit for appeal to this Court, and these, four appeals have been brought on t}la.t certificate .. Before us, the appeals have been. heard together and will be governed by this judgment. For a clear understanding and appreciation of the is_sues involved in these appeals, it is necessary to set qµt, in brief outline, the political and constitutional changes which the retroceded area has from time to ti:me ,undergone ; because those changes had important legal consequences.

Undei: the Instrument of Transfer executed sometime in 1881, when there was installation of the l\faharaja of Mysore by what has been called " the rendition of the State of Mysore ", the l\1ahi;traja agreed to grant to the Governor-General in Coun,ci.1 such land as .might be required for the establishment and maintenance of a British cantonment arn;l .to renounce all jurisdiction therein. ·Pursuant to tha~ agreement, the retroceded area was g:\!l!nted to. the 1 Gov-ernor-Genera~' in C0m;icil, and jurisdiction ther.ein· was. .exercised by virtue of powers given by the Ini.lian (Foreign Jurisdiction) Order in Council, 190~, made. under the Foreign Jurisdiction, A_ot, 1890. The laws administered in the area. included .various· • enactments made 'applical!le. 'thereto '.:fi:o~. ·t~me to [1959] r958 time by the promulgation of notifications made under the aforesaid Order in Council, and one of such T"' Income-tax h I d' I Officer, Bangalore enactments was t e n ian ncome-tax ct, 1922.

The ye:tr 194 7 ushered in great political and consti- K. N. G"rnswamy tutional changes in India, which affected not merely what was then called British India but also the Indian s. K. Das J. States, such as Mysore etc. The Indian Independence Act, 194 7, brought into existence two independent Dominions, India and Pakistan, as from August 15, 1947. The Act, however, received Royal assent on July 18, 194 7. Section 7 set out the consequences of the setting up of the two new Dominions : one such consequence was that the suzerainty of His Majesty over the Indian State~ lapsed, and with it lapsed all treaties, agreements etc.; J-J.Ktween His Majesty and the rulers of Indian States, incTuding all powers, rights, authority or jurisdiction exercisable by His Majesty in an Indian State by treaty, grant, usage, suffrage etc. In view of the aforesaid provision-perhaps in anticipation of it, the retroceded area was given back to the State of Mysore on July 26, '1947 by a notification made by the Crown Representative under the Indian (Foreign Jurisdiction)

Order in Council, 1937. This did not, however, mean that the Mysore laws at once came into force in the retroceded area. On August 4, 1947, the J\faharaja of Mysore enacted two laws: the Retrocession (Application of Laws) Act 1947, being Act XXIII of 1947, and the Retrocession (Transitional Provisions) Act, 194 7 being Act XXIV of 1947. The combined effect of these laws was this: all laws in force in the '.retroceded area prior to the the date of retrocession,. which was July 26, 1947, continued to have effect and be operative in the retroceded area (vide s. 3 of Act XXIII of 1947) and the Mysore office~s were g1 ven jurisdiction to deal with proceedings under the laws in force prior to the date of retrocession (see s. 12 of Act XXIV of 1947). This state of affairs continued till June 30, 1948, on which date was promulgated the Mysore Income-tax \tnd Exce,ss Profits Tax (Application to the Retroceded • Area) (Emergency) Act, 1948, being 'Act XXXI of 1948. Section a of this A'ct said-.

S.C.R. · "Notwithstanding· anything to the ·contrary in z958 section 3 of the Retrocession (Application of Laws) The Income-tax Act, 1947, Officer, Bangalore (i) the Mysore Income-tax Act, 1923, and (ii) the 'Mysore Excess Profits Tax Act, 1946, K. N. Guruswamy except sub-section (4) of section 2, and all rules, orders and notifications niade or issued under the aforesaid s. K. Das J. Acts and for the time being in force shall with effect from the first day of July, 1948, and save as otherwise provided in this · Act, take effect in the Retroceded Area to the same extent and in the same manner as in the rest of Mysore." Section 6 said- · " Subject to the provisioBs~fthis Act, the Indian Income-tax Act, 1922, and the Excess Profits Tax Act, 1940, as continued by the Retrocession (Application of Laws) Act, 1947, are hereby repealed." . The repeal of the Indian Income-tax Act, 1922, effected by s.

6 aforesaid, was subject to other provisions of Act XXXI of 1948, and one such pi·ovision which is material for the dispute before us was contained in s. 5, the relevant portion whereof was in these terms- "S. 5. Notwithstanding anything to the contrary in the Mysore Income-tax Act, 1923, or the Mysore Excess Profits Tax Act, 1946,- . (a) ., ................................... ;;; ..................... .

(b) in respect of the· total income · or profits chargeable to income-tax or excess profits tax in the Retroceded Area prior to the first day of July, 1948, but which has not been assessed until that date, the provisions of the Indian Income-tax Act, 1922, and the Excess Profits Tax Act, 1940, as in force in the 'Retroceded Area immediately before thatdate shall apply to proceedings relating to the assessment of such income or profits until the stage of assessment, and the determination ofthe income-tax and excess profits tax payable thereon, and the Mysore Income-tax Act, 1923, or the Mysore Excess Profits Tax Act, 1946, as the case may be, shall apply to sue~ proceedings af1ler that stage; IOI [1959] (c) ................. ········· ....................... ············. (d) ............................................................. . O~~:r~n~::;~;;e (e) ''' ······ · ·'''' · ··· ·····'' ··''' ··· ····'' · · ·''' ····· ···' ·' ···r· ·. The effect of ss.

3, 5 (b) and 6 of Mysore Act, XXXI K. N. Gurnswamy of 1948, inter alia, was that though the Indian Incometax Act, 1922, stood repealed and the Mysore Incomes. K. Das J. tax Act, 1923, came into effect from July 1, 1948 the former Act as in force in the retroceded area prior to July 1, 1948, continued to apply in respect of the total income chargeable to income-tax in the retroceded area prior to .July 1, 1948 but which had not been assessed until that date, and it further applied to all proceedings relating to the assessment of such income until the stage of assessment a~ .the determination of incometax but the Mysore Act, 1923, applied to such proceedings after that stage. On August 5, 1948, woe,s promulgated the Retroceded Area (Application of Laws) Act, LVII of 1948, which came into effect from August 15, 1948. Sections 3 and 4 of Act LVII of 1948, are material for our purpose and may be quoted- " s.

3. vided,- Except as hereinafter in this Act pro- (3) all laws in force in Mysore shall apply to the Retroceded Area ; and (b) the laws in force· in the Retro ceded Area immediately before the appointed day shall not, from that day, ha.ve effect or be operative in the Retroceded Area." "S. 4. The enactments in force in Mysore which are set out in the first column of Schedule A to this Act shall apply to the Retroceded Area subject to the modifications and restrictions specified in the second column of the said Schedule and the provisions of this Act." • Schedule A, paragraph (2), sub-paragraph (b) repeated in substance what was stated earlier in s. 5 (b) of Act XXXI of 1948. It read- " 2. Notwithstanding anything to the .contrary in the Mysore Income-tax Act, 1923, or the Mysore Excess Profits Tax Act, 1946- (a) ., ..... ,· ..................................................... .

S.C.R. · (b) in respect of the total income or profits charger95B able to income-tax or excess profits tax in the Retro- Th .I- ·f J l 19 8 b ncome-tax ced~d rea pr10r to t e first, ~y o u y . 4 , ut Officer, Bangalore which has not been assessed until that date, the provisions of the Indian Income-tax Act, 1922, and the K. N. Guruswamy Excess Profits Tax Act, 1940, as in force in the Retroceded Are'a, immediately. before that date shall 5· K. D«s J. apply to proceedings relating to the assessment of such income or profits until the stage of assessment, and the determination of the income-tax and excess profits tax payable thereon, and the Mysore Incometax Act, 1923, or the Mysore Excess Profits Tax Act, 1946, as the case may be, shall apply to such proceedings after that stage;" There were further far-reaching political and constituticmal changes in 1949-50.

The Maharaja of Mysore had acceded to the Dominion of India in 1947; this, however, did not empower the Dominion legislature to impose any tax or duty in the State of Mysore or any part thereof. By a proclamation dated November 25, 1949, the lVIaharaja of Mysore accepted the Constitution of India, as from the date of its commencement, as the Constitution of Mysore, which superseded and abrogated all oth~r constitutional provisions inconsistent therewith and in force in the State. On January 26, .1950, the Constitution of India came · into force, and Mysore became a Part B State within the Co;nstitution of India. On February 28, 1950, there was a financial agreement between the Rajpramukh of Mysore and the President of India in respect of certain, matters governed by Arts. 278, 291, 295 and 306 of the Constitution. Under Art. 277 of the Constitution, however, all taxes which immediately before the commencement of the Constitution were being levied by the State continued to be• so .Jevied, notwithstanding that those taxes . were mentioned in the Union List, until provision. to the contrary was made by Parliament by law.

Such law was made by the Finance .Act, 1950, by which the whole of Mysore including the' retroceded . area ,became " taxable territory " within the meaning of the Indian Income-tax Act, 1922, from April !• ·1950., and the [1959] z95B Indian Income-tax Act again came into force in the Th T I retroceded area from the aforesaid date. Section 13 e nconieax Officer Bangalore of the Frnance Act, 1950, dealt with repeals an • v. savings. As the true scope and effect of sub-s. (1) of K. N. Guruswamy s. 13 is one of the questions at issue before us, it is necessary to read it. . 5 · I(. Das J. "If immediately before the 1st day of April, 1950, there is in ·force in any Part B State other than Jammu and Kashmir or in Manipur, Tripura or Vindhya Pradesh or in the merged territory of Cooch.

Behar any law relating to income-tax or super-tax or tax on profits of business that law shall cease to have effect except for the purposes of the levy, assess. ment and collection of income-tax and super-tax in respect of any period not included in the previomi year for . the purposes of assessment under the• Indian Income.tax Act, 1922, for the year ending on the 31st day of March, 1951, or for any subsequent year, or, as the case may be, the levy, assessment and collection of the tax on profits of business for any chargeable accounting period ending on or before the 31st day of March, 1949: Provided that any reference in any such law to an officer, authority, tribunal or court shall be construed as a reference to the corresponding officer, authority, tribunal or court appointed or constituted under the said Act, and if any question arises as to· who such corresponding officer, authority, tribunal or court is, the decision of the Central Government thereon shall be final : "

Now, the legal effect of the. constitutional changes referred to above, so far as it has a bearing on the present dispute, may be briefly summarised as follows: the Indian Income-tax Act, 1922, remained in force in the retroceaed area till June 30, 1948; from J nly l, 1948, the Mysore Income.tax Act, 1923, applied, subject to this saving that the Indian Income-tax Act continued to apply in respect of the total income chargeable to income tax in the retroceded area prior to Ju];· l, 1948, and the provisions of that Act as in force in the retroceded area prior to that date applied to all proceedings .i:elating to. the assessment of such income S.C.R. upto the stage of assessment and determination of I958 income- ~ax payable thereon .. This position continued The Income-tax till April 1, 1950, when the Fmance Act, 1950, came Officer,- Bangalore into force and the Indian Income-tax Act, 1922, again came into force in the retroceded area, subject to the K. N. Guruswam; saving mentioned in s.

13(1) thereof. The principal question before us, as it was before 5· I<. Dai f. the High Court, is one of jurisdiction. Did the Incometax Officer concerned have jurisdiction to issue the notice under s. 34 of the Indian Income-tax Act, 1922, and to make a re-assessment order pursuant to such notice ? The High Court pointed out that though the notice did not clearly say so, the Income-tax Officer clearly acted under s. 34 of the Indian Income-tax Act, 1!)22, as it was in force in the retroceded area prier to July 1, 1948, and the writ applications were decided on that footing. The four main lines of argument on which the respondent assessee rested his contention that the Incometax Officer concerned had no jurisdiction were these : firstly, it was urged thats.

34 of the Indian Incometax Act, 1922, was not saved by s.13(1) of the Finance Act, 1950, because what was saved was the prior law "for the purposes of the levy, assessment and collection of income-tax", which expression did not include re-assessment proceedings; secondly, it was argued that, . even otherwise, the financial agreement made between the President of India and the Rajpramukh i of Mysore on February 28, 1950, which received constitutional sanctity in Art. 278 of the Constitution, rendered the impugned proceedings unconstitutional and void; thirdly, it was submittoo that the Indian Income-tax Act, 1922, as in force in the retroceded area stood repealed on June 30, 1948, by Mysore Act XXXI of 1948,. and the saving provisions ins. 5 (b) thereof or in paragraph (2), sub-paragraph (b), of Schedule A to Mysore Act LVII of 1948, did not save s.

34 in so far as it permitted re-assessment proceedings.in respect of years in which there had been an assessment already; and lastly, it was contended that after June 30, 1948, and until April 1, Hf50, the In-. come-tax Officer in the retroceded area. could re-open [1959] z958 the assessment under s. 34 of the Mysore Income- T! I t tax Act, 1923, within a period of four years specified Je neome~ax Officer Bangalore t ierem, ut t ere was no authority to re-open the • v. assessment under s. 34 of the Indian Income-tax r\, N. Guruswamy A.ct. Following its own decision, City Tobacco Mart and 5· IC Das 1· Others v. Income-tax Officer, Urban Circle, Bangalore('), on certain earlier writ petitions (nos. 52 and 53 of 1953 and 105 and 106 of 1954), the High Court held in favour of the assessee on the construction of s. 13 (1) of the Finance Act, 1950 and also on the effect of the saving provisions ins.

5 (b) of Mysore Act XXXI of 1948, and paragraph (2), sub-paragraph (b) of Schedule A to Mysore Act LVII of 1948. On these findings, it held that the Income-tax Officer concerned had no jurisdiction or authority to start the impugned proceedings or to make the impugned orders of assessment. It did not feel called upon to pronounce op the validity of the argun1;ent founded on the financial agreement dated February 28, 1950. In Civil Appeals 143-145 of 1954, Civil Appeals 27 to 30 of 1956 and Civil Appeals 161 to 164 of 1956, Lakshmana Shenoy v. The Income-tax O,tJicer, Ernakulam ('), in which judgment has been delivered today, we have fully considered the arguments as to the true scope and effect of s. 13(1) of the Finance Act, 1950, and of the financial agreement of February 28, 1950, taken along with the recommendations of the Indian States Finances Enquiry Committee. We have held therein that the expression 'levy, assessment and collection of income-tax' ins.

13 (1) is wide enough to comprehend re-assessment proceedings under s. 34 and that the financial agreement aforesaid, on a true construction of the recommendations of the Enquiry Committee, does not render the impugned proceedings unconstitutional and void. That decision disposes of these two arguments in the present appeals. The two additional points which remain for consideration depend on the interpretation to be put QU the saving pro_visions in s. 5(b) of Mysore Act XXXI of • l!J48 and paragraph (2), sub-paragraph (b) of Schedule (1) A.l.R. 195_:; Mys,49. (2) [1959] S.C.R. 751. S.C.R. A to Mysore Act LVII of 1948. These provisions are z95B expressed in identical terms, and the question is if 1.h 1 t 3 I d. I ncome.- a:I' they save s. 4 o t e n ian .ncome-tax .ct wit Officer, Bangalor4 regard to re-assessment proceedmgs. We thmk that they do. It is worthy of note that the saving provi- K. N. Guruswamy sions say that the Indian Income-tax Act, 1922, as in force in the retroceded area prior to July 1, 1948, shall s.

K. pas f. apply in respect of the total income chargeable to income tax prior to that date and it shall apply to proceedings relating to the assessment of such income until the stage of assessment and determination of income-tax payable thereon. ' Total income ' means the tota,l amount of income, profits and gains computed in the manner laid down in the Act, and there are no good reasons why the word' assessment' occurring in the saving provisions should be restricted in the manner suggested so as to exclude proceedings for assessment of escaped income or under-assessed· income. On behalf of the assessee our attention has been drawn to the words "in respect of the total income chargeable to income-tax ............ but which has not been assessed until that date " occurring in the saving provisions and the argument is that those words show that there was no intention to permit· re: opening of assessments which had been made already. We are unable to accept this argument.

In its normal sense, ' to assess ' means 'to fix the amount of tax or to determine such amount'. The.process of re-assessment is to the same purpose and is included in the connotation of the term" assessment". The reasons which led us to give a comprehensive meaning to the word "assessment" in s. 13 (1) ·of the Finance Act, 1950, operate equally with regard to the saving provisions under present consideration. We agree with the view expressed in Hirjibhai Tribhuvand:as v. Incometax Officer, Rajnandgaon and another (1), thats. 34 of the Income-tax Act contemplates different cases in which the power to assess escaped income has been given.; wliere there has been no assessment at all, the term "assessment" may be appropriate and whete there was assessment at too low a rate or with • (x) A.I.R. 1957 M.P. 171. [1959] x958 unjustified exemptions, the term' re-assessment' may Th I be appropriate, and it may have been necessary to use ' "'ome ax t d""" · h 1 · d""" Offiee>. Bangalore wo .

I11eren erms to cover wit c anty t e 111erent cases dealt with in the section; but this does not mean ·K. N. Guruswamy that the two terms should be treated as mutually exclusive or that the word 'assessment' in the saving s. K. Das J. provisions should be given a restr~cted meaning. The object of the saving provisions was obviously to make the prior law available in all cases in which the income was assessed or was assessable according to that law before July 1, 1948, and it is difficult to see why only a part of the process of assessment should be saved and the other part repealed. We, therefore, hold that the saving provisions save s. 34 of the Indian Income-tax Act, 1922, in its entirety, as it was in force in the retroceded area prior to July 1, 1948, and the contention of the respondent that it stood repealed from that date is not correct. As to the period of limitation, it would be the period laid down in s.

34 of the Indian Income-tax Act as it was in force in the retroceded area prior to July 1, 1948. The result, therefore, is that these appeals succeed and the judgment and order of the High Court of Mysore dated March 22, 1955, are set aside and the writ petitions filed by the respondent assessee are dismissed. The appellant will get his costs in this Court and the High Court. Appeals allowed .