MURLIDHAR MADANLAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this case the assessee is a firm consisting of two partners, Murlidhar Surekha and Madanlal Modi, having an equal share in the firm. For the asst. year 1946 -47 the firm submitted a return of income under S. 22(2) of the IT Act. The return showed that the firm had received an income of Rs. 22,946 from trade in cloth. Acting under the provisions of S. 22(4) of the IT Act, the ITO called upon the assessee to produce account books for the years 1350 -51 and 1352 fasli. It should be stated that the accounting year in this case corresponds to the period from 27th July, 1944, to 12th Aug., 1945 (which is roughly equivalent to 1352 fasli). On the 3rd Aug., 1946, the ITO issued another notice against the assessee under S. 22(4) asking it to produce the accounts for the three years, 1348, 1349 and 1350 fasli. The ITO adopted this procedure since he found that the assessee had manipulated its accounts for the previous years and had returned false figures as to its income. The ITO, therefore, found it necessary to call for the accounts for the earlier years and to quote his language ''a correct appraisement of the accounts of the previous year, which, being a continuation of the past accounts were really dependent upon the assets and liabilities derived from old.'' On 9th Aug., 1946, the assessee produced account books for the years 1351 and 1352 fasli. As requested by the assessee, the ITO granted him time to produce the accounts for the earlier fasli years. Several opportunities were granted to the assessee, but the account books from 1348 to 1350 fasli were not produced before the ITO during the assessment proceedings. It was explained on the part of the assessee that the account books were kept at Rajputana, but Murlidhar, one of the partners, admitted that no effort had been made to fetch the account books from Rajputana. Murlidhar further stated that there was a dispute between the partners, and account books could not be produced also for that reason. The defendant's explanation was rejected by the ITO who reached the conclusion that the account books from 1348 to 1350 fasli were being deliberately withheld. The ITO, therefore, completed the assessment under S. 23(4) of the IT Act. The income of the assessee was estimated to be Rs. 60,000 for the assessment year in question, and tax was imposed upon the assessee with regard to the estimated income. The firm of the assessee was registered up to the asst. year 1945 -46, but for the asst. year 1946 -47 the ITO refused registration of the firm on the ground that there had been default. The assessee made an application to the ITO on 4th Dec., 1947, for reopening the assessment under S. 27. This application was rejected by the ITO on the ground that there was no case made out on the part of the assessee for reopening the assessment proceedings. The assessee preferred three appeals before the AAC : (1) against the quantum of assessment under S. 23 (4); (2) against the order rejecting the application under S. 27 and (3) against the refusal of the ITO to register the firm. The AAC allowed the appeal as regards the quantum of assessment and reduced the estimate of income to the sum of Rs. 40,000. But the other two appeals preferred by the assessee were dismissed. Against the order of the AAC the assessee took the three appeals to the Tribunal. As regards the quantum of assessment, the Tribunal reduced the estimated income to the figure of Rs. 40,000. The Tribunal, however, dismissed the appeals with regard to the order passed by the ITO under s. 27 and the refusal of the ITO to register the firm for the asst. year 1946 -47. Under S. 66 (1) of the IT Act the assessee applied to the Tribunal for referring the case to the High Court on several questions of law. The assessee had prayed to the Tribunal that the question as regards registration of the firm and as to dismissal of the application under S. 27 should be referred to the High Court. The Tribunal has rejected the application of the assessee on these points but has referred only the following question of law for the opinion of the High Court -

(2.) THE contention put forward by Mr. Untwalia on behalf of the assessee is that the notice issued under S. 22(4) of the Act is wholly illegal and that the ITO could not legally proceed under S. 23 (4) of the IT Act and make an estimate of the income of the assessee to the best of his judgment. The argument of the learned counsel is based upon S. 22 (4) of the Act which is in the following terms - ''The ITO may serve on any person who has made a return under Sub -S. (1) or upon whom a notice has been served under Sub -S. (2) a notice requiring him, on a date to be therein specified, to produce, or cause to be produced such accounts or documents as the ITO may require: Provided that the ITO shall not require the production of any accounts relating to a period more than three years prior to the previous year.'' It was contended that the ITO had no warrant for asking the assessee to produce the account books for the year 1348 fasli since there was an express prohibition in S. 22(4) of the Act which debars the ITO from calling for the production of the account books relating to a period more than three years prior to the previous year. It was conceded by Mr. Untwalia that the ITO could validly require the assessee to produce account books for the years 1349, 1350 and 1351 fasli; but the argument was that the whole notice was illegal and the ITO had no jurisdiction to proceed against the assessee under S. 23(4) for non -compliance with the illegal notice. In this connection it is necessary to consider the language of S. 23(4) which states -''If any person fails to make the return required by any notice given under Sub -S. (2) of s. 22 and has not made a return...under Sub -S. (3) of the same section or fails to comply with all the terms of a notice issued under Sub -S. (4) of the same section or, having made a return, fails to comply with all the terms of a notice issued under sub - S. (2) of this section, the ITO shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment and, in the case of a firm, may refuse to register it or may cancel its registration if it is already registered.'' If S. 23(4) is closely examined it is clear that the ITO has jurisdiction to proceed under this sub - section if the assessee fails to comply with all the terms of the notice issued under S. 22(4) of the Act. The argument advanced by Mr. Untwalia is that there is no legal notice under S. 22(4) and therefore there was no default on the part of the assessee under s. 23(4), and the ITO had no jurisdiction to make estimate of the income of the assessee to the best of his judgment under the provisions of S. 23(4). In our opinion there is a fallacy lurking in the argument addressed by Mr. Untwalia. It is true that the ITO had no power to call upon the assessee to produce account books for the year 1348 fasli but the notice under S. 22(4) printed at page 8 of the paper book shows that the assessee was called upon to produce account books not only for 1348 fasli but also for 1349 to 1352 fasli. The notice may be illegal so far as the demand for the account books of the year 1348 is concerned but that does not mean that the notice is illegal so far as the ITO required the assessee to produce account books for the year 1349 fasli to 1352 fasli. In our opinion the notice under S. 22(4) so far as the demand for the account books for the year 1348 is concerned is clearly severable from the notice which required the assessee to produce account books for the year 1349 to 1352 fasli. The illegality as regards the demand of the account books for the year 1348 is clearly severable from the rest of the terms of this notice which are admittedly legal. The position is as if two notices had been issued, one requiring the assessee to produce account books for the year 1348 fasli and the other requiring the assessee to produce account books for the years 1349 to 1352 fasli. Since the illegal portion of the notice is clearly severable from the legal portion of the notice we are unable to accept the argument of Mr. Untwalia that the whole notice is bad for non -compliance of the proviso to S. 22(4). If we are right in holding that the notice under S. 22(4) is not illegal so far as the account books for the years 1349 to 1352 are concerned then the assessee is clearly guilty of non - compliance with the terms of the legal portion of the notice and the ITO had jurisdiction to hold that there was default on the part of the assessee to make estimate of his income to the best of his judgment under the provisions of S. 23(4) of the Act. In our opinion the proceedings taken by the ITO in completing assessment for the year 1946 -47 under S. 23(4) of the Act were perfectly valid and we do not think that the assessment order is in any way illegal.

(3.) FOR the reasons we have already given we hold that the ITO could validly make assessment in this case under S. 23(4) of the IT Act and the assessment made upon the assessee for the year 1946 -47 under S. 23(4) must be held to be perfectly legal. We accordingly answer the question against the assessee and in favour of the IT Department. The assessee must pay the cost of this reference. Hearing fee Rs. 250.