COMMISSIONER OF INCOME TAX Vs. PATEL L A

JUDGEMENT

(1.) THIS reference arises out of an assessment made on the assessee as an individual under s. 34(1) (a) of the IT Act, 1922. The reference relates to the asst. yr. 1946-47, the relevant account year being the financial year ending 31st March, 1946. During the relevant account year the assessee was serving as a Dy. Engineer in the Public Works Department of the Government of Bombay and the salary drawn by him in that year amounted to Rs. 5,326. The assessee was assessed for the first time for the asst. yr. 1947-48 and so far as the prior assessment years including the asst. yr. 1946-47 were concerned, no notice was issued to the assessee under s. 22(2) nor did the assessee file any return of his income and no assessment was made on the assessee for those assessment years. It appears that some time after the assessment for the asst. yr. 1947-48 was completed, the ITO received information that the assessee had made large deposits in his current deposit accounts with the Central Bank of India Ltd. and the Bank of India Ltd. in the earlier assessment years including the asst. yr. 1946-47 and since the assessee was not able to satisfactorily explain the source of these deposits, the ITO issued a notice under s. 34(1)(a) against the assessee and the notice first issued against the assessee was for the asst. yr. 1945-46. Before the ITO could issue a similar notice for the asst. yr. 1946-47, the assessee submitted a voluntary return of his income for that assessment year under s. 22(3) on 20th December, 1954. In the return the assessee showed an income of Rs. 1,217 which was arrived at after deducting a loss of Rs. 4,223 in speculation from the salary of Rs. 5,326 and dividend income of Rs. 147. The ITO did not act on this return and, ignoring it, issued a notice under s. 34(1)(a) against the assessee for the asst. yr. 1946-47 and the notice was served on the assessee on 22nd March, 1955. The assessee disputed the validity of the notice on the ground, inter alia, that the ITO was not entitled to take action under s. 34(1)(a) in view of the voluntary return filed by the assessee but ultimately the assessee filed a fresh return on 5th November, 1955, in compliance with the notice under s. 34(1)(a). The ITO, thereafter, proceeded to complete the assessment under s. 34(1)(a) and he made an order dated 20th March, 1956, assessing the assessee on a total income of Rs. 51,098 which included a sum of Rs. 49,800 forming part of the deposits in the bank accounts of the assessee as income from undisclosed sources. The assessee carried the matter in appeal to the AAC. Two grounds were raised before the AAC : one was that the assessment under s. 34(1)(a) was invalid since the assessee had already filed a voluntary return before the issue of the notice under s. 64(1)(a) and the second was that the addition of Rs. 49,800 made by the ITO was improper and unjustified. The first ground was rejected by the AAC but, so far as the second ground was concerned, the AAC gave relief to the assessee to the extent of Rs. 10,800. The assessee thereupon preferred an appeal to the Tribunal. The Tribunal, relying upon the decision of the High Court of Bombay in Ranchhoddas Karsondas vs. CIT (1954) 26 ITR 105 (Bom), took the view that the submission of voluntary return by the assessee precluded action under s. 34(1)(a) and the Tribunal, accordingly, set aside the assessment without going into the question whether the addition of income from undisclosed sources made by the Revenue authorities was justified. The CIT being aggrieved by this decision applied for a reference and since a question of law admittedly arose out of the decision of the Tribunal, the present reference was made by the Tribunal. It may be pointed out that whilst the reference application was pending before the Tribunal, the decision of the Bombay High Court in Ranchhoddas Karsondas's case (supra) was confirmed by the Supreme Court and it is now reported as CIT vs. Ranchhoddas Karsondas (1959) 36 ITR 569 (SC).

(2.) NOW, as we have pointed out above, the Tribunal relied wholly and completely on the decision in Ranchhoddas Karsondas's case (supra) in setting aside the assessment made under s. 34(1)(a) by the ITO. It would, therefore, be necessary to examine the true scope and import of that decision, but, before we do so, we would prefer to examine the question on principle. The assessment was made by the ITO on the assessment under s. 34(1)(a) and the ground on which the notice for initiating proceedings under that section was issued was that the ITO had reason to believe that, by reason of the omission or failure on the part of the assessee to make a return of his income under s. 22 for the asst. yr. 1946-47, the income of the assessee had escaped assessment. Before the notice was issued by the ITO, the assessee submitted a voluntary return of income showing a net income of Rs. 1,217 which was below the taxable limit. The question is whether the submission of this voluntary return precluded the ITO from issuing notice under s. 34(1)(a). At one time there was a sharp conflict of opinion between the Bombay High Court on the one hand and the Calcutta High Court on the other whether a voluntary return disclosing income below the taxable limit could be regarded as a valid return under s. 22, but this conflict was set at rest by the Supreme Court in Ranchhoddas Karsondas's case (supra) by holding that the view taken by the Bombay High Court was the sounder of the two views and that a return showing income below the taxable limit could be validly filed in answer to a notice either under sub-s. (1) or sub-s. (2) of s. 22 and that such a return would be a good return. The voluntary return filed by the assessee could not, therefore, be ignored as an invalid return on the ground that it disclosed income below the taxable limit. NOW it is clear, having regard to the provisions of s. 22, that a return may be filed by an assessee in response to the public notice under s. 22(1) or it may be filed in response to an individual notice served on the assessee under s. 22(2). But even where an assessee has not submitted a return in response to the public notice under s. 22(1) and no individual notice has been served on the assessee in the course of the assessment year under s. 22(2), the assessee may yet make a voluntary return under s. 22(3) at any time after the expiration of the assessment year but this return must evidently be made before the expiration of the time limited for making an assessment under s. 23. This last qualification follows logically from the language of s. 22, sub-s. (3). That sub- section provides that if an assessee has not furnished a return within the time allowed by or under sub-s. (1) or sub-s. (2), he may furnish a return at any time before the assessment is made. This provision postulates that the return must be filed at a point of time when the assessment can be lawfully made and therefore it must follow that the return to be a valid return under s. 22(3) must be filed before the expiration of the time limited for making an assessment under s. 23. NOW under s. 34(3), except in certain limited cases, which are not relevant for the purpose of the present reference, the normal period of limitation for making an assessment is four years from the end of the assessment year. It would, therefore, appear that a return under s. 22(3) must be filed at the latest before the expiration of the period of four years from the end of the assessment year. So long as the return is filed within such period, the ITO can proceed to process the return and assess the assessee under the relevant provision of s. 23 and in such a case it cannot be said that the income of the assessee has escaped assessment by reason of the omission or failure on the part of the assessee to file a return of his income so as to attract the applicability of s. 34(1)(a). In the first place, the return having been filed, it would not be possible to say that the assessee has omitted or failed to file a return of his income and, secondly, the return being before the ITO and the ITO being lawfully entitled to process the return and assess the assessee under s. 23, it would not be possible to say that the income of the assessee has escaped assessment. This was exactly the position in Ranchhoddas Karsondas's case (supra). There the voluntary return for the asst. yr. 1945-46 was submitted by the assessee on 5th January, 1950, that is, before the expiration of the period of four years from the end of the assessment year and it was in the context of the voluntary return so submitted that the Supreme Court took the view that the ITO was not entitled to ignore the return and to take proceedings under s. 34(1)(a). Hidayatullah, J., speaking of the notice issued by the ITO under s. 34(1)(a), observed : "This notice was improper, because with the return already filed, there was neither an omission nor a failure on the part of the assessee nor was there any question of assessment escaping." But where the voluntary return is submitted by the assessee after the expiration of the period of four years from the end of the assessment year, the position would be clearly different. In such a case the period of four years having expired, the ITO would have no jurisdiction to proceed to assess the assessee in the ordinary way under s. 23 ( without invoking the aid of s. 34(1)(a)) by reason of s. 34(3) and the submission of the voluntary return would be futile. The result would be that the income of the assessee would have escaped assessment by reason of the omission or failure on the part of the assessee to make a return of his income and the terms of s. 34(1)(a) would consequently be satisfied and the ITO would be entitled to proceed to take action by issuing notice under that section. It is, therefore, clear that where a voluntary return of income is filed by an assessee before the time limited under s. 34(3) for making an assessment under s. 23 has expired, the ITO can proceed to make an assessment under s. 23 without having recourse to s. 34(1)(a) but where the voluntary return is filed subsequently, the ITO cannot make an assessment under s. 23, but must proceed under s. 34(1)(a) if he wants to bring to tax such income and the subsequent filing of the voluntary return would not avail to preclude initiation of proceedings under s. 34(1)(a). We find that this view which we are taking has also found favour with the Madras High Court in Santosha Nadar vs. First Addl. ITO (1961) 42 ITR 715 (Mad). Applying this principle to the facts of the present case, it is clear that the voluntary return of income was submitted by the assessee long after the expiration of the period of four years from the end of the asst. yr. 1946-47, and the submission of the voluntary return could not, therefore, have the effect of precluding the ITO from proceeding to take action under s. 34(1)(a).