Case: Esthuri Aswathiah Vs. The Income-Tax Officer, Mysore State

2. The appellants are a Hindu Undivided Family carrying on business in groundnuts and other commodities at Goribidnur, Kolar District, in the territory which formed part of the former State of Mysore. The Mysore Income-tax Act was repealed and the Indian Income-tax Act was brought into force in the Part-B State of Mysore as from April 1, 1950. The appellants had adopted as their year of account July 1 to June 30 of the succeeding year and they were assessed under the Mysore Income-tax Act on that footing for the year of assessment 1949-50 corresponding to the year of account July 1, 1948, to June 30, 1949. After the Indian Income-tax Act was applied to the State of Mysore on December 26, 1950, notice under S. 22(2) of the Indian Income-tax Act was served upon the appellants requiring them to submit their return of income for the assessment year 1950-51. On September 8, 1952, the appellants submitted their return stating that for the year ending June 30, 1949, corresponding to the assessment year 1949-50, they were assessed under the Mysore Income-tax Act, that their income for year ending June 30, 1950, was assessable under the Indian Income-Tax Act in the assessment year 1951-52 and that they had no assessable income of the assessment year 1950-51. The Income-tax Officer passed on that return an order "no proceeding" and closed the assessment. For the assessment year 1951-52, the appellants submitted their return of income. In the books of account produced by the appellant an opening cash credit balance of Rs. 1,87,000/- odd on July 1, 1949, was disclosed. The Income-tax Officer called upon the appellants to produce their books of account of previous years, but the books were not produced on the plea that the same were lost. In assessing the income of the appellants for the year of account 1949-50, the Income-tax Officer held that Rs. 1,37,000/- out of the opening balance in the books of account dated July 1, 1949, represented income from an undisclosed source. In appeal, the Appellate Assistant Commissioner observed that the appellants not having exercised their option under S. 2 (ii) of the Indian Income-tax Act, and in the absence "of any system of accounting adopted" by them, the only course open to the Income-tax Officer was to take the financial year ending March 31, 1950, as the previous year for the income from an undisclosed source, and directed the Income-tax Officer to consider this credit in the assessment for the year 1950-51 after giving opportunity to the appellants to explain the nature and source thereof. Before the appeal was disposed of by the Appellate Assistant Commissioner, the appellants had submitted a fresh return for the assessment year 1950-51 purporting to do so under S. 22(3) of the Indian Income-tax Act. Pursuant to the direction of the Appellate Assistant Commissioner, the Income-tax Officer issued a notice of reassessment under S. 34 of the Income-tax Act and served it on October 15, 1957, calling upon the appellants to submit a fresh return. The appellants thereupon, submitted a petition under Art. 226 of the Constitution to the High Court of Mysore praying for an order declaring that the notice under S. 34 was without jurisdiction and for quashing the notice and proceeding consequent thereon. This petition was dismissed by the High Court, but the High Court, on the application of the appellants, certified that the appeal was a fit one for appeal to this court.

Court's reasoning:
Though called upon, they did not produce their books of account for the earlier year. The appellants had failed to disclose in their return for the assessment year 1950-51 any income. In the circumstances, the Income-tax Officer had reason to believe that by reason of failure on the part of the appellants to disclose fully and truly all material facts necessary for assessment for that year, income chargeable to tax had escaped assessment. The Income-tax Officer had therefore jurisdiction to issue the notice for reassessment8. By virtue of S. 13(1), the Mysore Income-tax Act ceased to be in operation as from April 1, 1950, except for the purposes of levy, assessment and collection of income-tax and super-tax in respect of any period which was not included in the previous year for the purposes of assessment under the Indian Income-tax Act for the assessment year 1950-51. The appellants had been assessed for the period July 1, 1948 to June 30, 1949, under the Mysore Income-tax Act. It is manifest that for any account year which was the previous year in relation to the assessment year 1950-51, the appellants were liable to be assessed under the Indian Income-tax Act and not under the repealed Act. The year of account July 1, 1949 to June 30, 1950, was not a period prior to such previous year and therefore liability to pay tax in respect of that period could be assessed not under the Mysore Income Tax Act, but under the Indian Income-tax Act. It was urged that this interpretation of S. 13 may, when the account year of an assessee does not coincide with the financial year lead to double taxation of the income for the account year ending between April 1, 1949 and March 31, 1950. But in order to avoid the contingency envisaged by the appellants, the Central Government has, in exercise of its power under S. 60A of the Indian Income-tax Act, issued the Part-B States (Taxation Concessions) Order, 1950, which by cl. 5(1) provides amongst other things, that the income, profits and gains of any previous year ending after the 31st day of March, 1949, which is a previous year for the State assessment year 1949-50 shall be assessed under the Act (Indian Income-tax Act, 1922) for the year ending on the 31st March, 1951, if and only if such income, profits and gains have not, before the appointed day, been assessed under the State law. If, in respect of the previous year for the purposes of the assessment year ending 31st March, 1951, the appellants had been assessed by the State Government under a law relating to income-tax in force in the State, the India Income-tax authorities would be incompetent to assess income for that year; but in default of such assessment income of the appellants for that year was assessable under the Indian Income-tax Act9. The notice under S. 34 was also not issued after the expiry of the period prescribed in that behalf. The notice was issued by the Income-tax Officer because he had reason to believe that by reason of failure on the part of the appellants to disclose fully and truly all material facts necessary for the assessment for the year 1950-51, income had escaped assessment. Such a notice fell manifestly within S. 34(1)(a) and could be issued within eight years from the end of the year of assessment. The impugned notice under S. 34 for reassessment of the income of the appellants for the year 1950-51 was, in our judgment, properly issued and the High Court was right in dismissing the petition for a writ to quash the notice.