Case: S. S. Gadgil, Income-Tax Officer, Bombay Vs. Lal And Company

1. Messrs. 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 assessees books of account were examined by the Incometax Officer and it was noticed that the assessee had business connections with certain non-resident parties. On March 12, 1957, the Income-tax Officer issued a notice calling upon the assessee to show cause why in respect of the assessment year 1954-55 the assessee should not be treated 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 dealings" with any non-resident party and that in any event the proposed action was barred because the period prescribed for initiation of proceeding had expired, and requested the Income-tax Officer to drop the proceeding. The Inoome-tax Officer B-III Ward, Bombay issued on March 27, 1957, a 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 a 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 nonresidents. He therefore treated the assessee as agent of the non-resident parties, under S. 43 of the Act.2. The Income-tax Officer also rejected the contention of the assesse 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(1) (b) (iii) (sic) 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 a person on whom the assessment or reassessment is to be made as an agent of a non-resident person under S. 43 of the Act for the assessment year 1954-55, and accordingly assessessed the income, of the assessee at Rs. 64,684/-, estimating the income of the parties residing outside the taxable territories, in the absence of accounts to be Rs. 50,000/ -3. The assessee then filed a petition under Art. 226 of the Constitution in the High Court of Judicature at Bombay praying that a 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 proceedings by way of recovery or otherwise in pursuance of the orders of assessment. The assessee pleaded, inter alia, that the proceedings for assessment under 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. Vasantsen Dwarkadas, 1956-29 ITR 857 : (S) AIR 1956 Bom 530  ) 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 provided thereby could not be extended by the Finance Act of 1956 so as to authorise the Income-tax Officer to issue a notice far assessment or reassessment of the assessee as statutory agent of a party, residing outside the taxable territory. In the view of the High Court the notice dated March 27, 1957, was invalid, and a valid notice being a condition precedent to the exercise of jurisdiction 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.

Reasoning: 12. 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 a tax payer of the plea that action for assessment or re-assessment could not be commenced, on the ground that before the amending Act became effective, it was barred. Therefore the view that even when the right to assess or reassess has lapsed on account of the expiry of the period 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 accepted in Calcutta Discount Companys case, 1953-23 ITR 471   : (AIR 1953 Cal 721  ).13. As we have already pointed out the right to commence a proceeding for assessment against the assessee as an agent of a 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 a person as an agent of a foreign party under S. 43 within two years from the end of the year of assessment. But authority 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 a 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 commencement of the amending Act. The legislature has given to S. 18 of the Finance Act 1956, only a limited retrospective operation i.e. up to 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 a greater retrospectively than is expressly mentioned, nor to authorise the come-tax Officer to commence proceedings which before the new Act came into force had by the expiry of the period provided become barred.A proceeding for assessment is not a suit for adjudication of a civil dispute. That anproceeding is in the nature of a judicial proceeding between contesting parties, is a matter which is not capable of even a plausible argument. Theauthorities who have power to assess and recover tax are not acting as judges deciding a litigation between the citizen and the State: 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: Commissionerof Inland Revenue v. Sneath, (1932) 17 Tax Cas 149 at p.64 and ShellCo. of Australia Ltd. v. Federal Commissioner of Taxation, 1931 ACit may be recalled that the amending Act of 1948 with which the Court was concerned in Calcutta Discount Companys case,ITR 471 : (Al R 1953 Cal 721  ) came into force on September 8, 1948, but S.1 (2) prescribed that the amendment in S. 34 of theAct, 1922, shall be deemed to have come into force on March 30, 1948, and the period under the unamended section within which notice could be issued under S.34(3) against the assessee company ended on March 31, 1951. Before that date the amending Act came into operation, and at no time had the right to