M. Chockalingam & Another v. Commissioner of Income-Tax, Madras & Another

Hidayatullah, J. is paid. This right of an assessee to obtain a decision

of the Inspecting Assistant Commissioner in either case is denied to the assessee if he is not sent a notice and is not afforded a hearing as required by section 35 (Proviso). It is contended on the strength of a ruling of Bombay High Court in Lata Mangeshkar v. Uniim of India(') that the addition of interest being compulsory under sub-s.(8) the fifth proviso under sub-s.(6) which invests the Income-tax Officer with discre-tion is not applicable. It is also stated in that case that sub-s.(8) only" requires that the calculation should be in accordance with sub-s.(6) and the fifth proviso to sub-s. (6) is not concerned with calculation and can-not be applied to cases arising under sub-s. (8). We do not agree that the fifth proviso to sub-s.( 6) does not apply to a case arising under sub-s.(8). Sub-section (6) without 1eserve is expressly made applicable and this Court in Gursahai Saigal' s(') case has ruled that in cases arising under the sub-s. (8) the sixth sub-s. is to be applied mutatis mutandis. If sub-s. (6) is appli-cable the discretion which is contemplated under the fifth proviso read with rule 48 is open not only in cases arising under sub-ss. (2) and (3) of section ISA but also in cases arising under sub-s. (8). There is nothing to show that in applying sub-s. (6) any of the provisos are to be left out. The eighth sub-section no doubt uses the word "shall" but in the context of sub-s. (6) and the fifth proviso the word can only be read as mandatory if the relief under the proviso is not given. The circumstances which entitle an Income-tax Officer to give relief in cases arising under sub-s. (2) and (3) may also be. circumstanci;s justify-ing relief in cases arising under sub-s. (8). It was ruled in Income-tax Officer, Circle II, Madura v. M. R. Vid11a~ar,( 8) that the 5th proviso and rule 4S

(I) !1959] 861, T, R, 527. 12) [1963] 3 S,C a, 193, 111 [1982] Supp. 2 S, C. 1\, 6131 were intended to relieve against the rigour of the in-1962 flexible rule originally enacted in sub-s.(6). The M. Ohockalingam effect of the introduction of the proviso mutatis mutan-v.

affects sub·s. (8) as well. All the sub-rules of O:nnmissimur of dis Inc01lU· 14-c, Madra Rule 48 apply equally to a case of part payment and a case of no payment of advance tax. There may be Hidayatullah, J. as good a justification for not paying the advance tax wholly as for not paying it partly. The present case is an apt illustration because the order of the High Court was passed in 1947 and effect to it was given by the Tribunal in 1950. The compromise with the Income-tax Department in relation to the back years took place in 1952 and the assessments for 194 7-48 and 1949-50 were only completed on the last day of March, 1953. It is thus apparent that for the assess-ment years 1951-52 and 1952-53 the appellants might if opportunity had been given to them, have convinced the Inspecting Assistant Commissioner that they had good grounds for not paying the advance tax because their cases were still in the process of consideration and settlement. No doubt, the Inspecting Assistant Commissioner might have disagreed with their claim but the opportunity to bring the cases to the.notice of the Inspecting Assistant Commissioner was denied to the appellants if they did not receive a notice and were not heard against the express direction in the proviso to section 35. In our opinion, there was a clear breach of the principles of natural justice in the present case.

It is contended that this is not a case in which we should reverse the order of t"e High Court because the grant ot writ is discretionary and if the High Court declined to give a writ because in its opinion penal interest was payable, we should not take a contrary view and grant the writ here. The question is not whether penal interest was payable or not but whether an opportunity had to be given to the appel-lants as required by the proviso to section 35 to show cause against the demand for penal interest. If thi$

1962 opportunity was not given the High Court should ha\·e M. Chockalingrim acted to rectify that error. The authorities acting

v. under the Indian Income-tax Act have to act judi-Commissioner of cially and one of the requirements of judicial action Incomt-lax, Madras

is to give a fair hearing to a person before deciding Hidayatultah, J. against him. In a recent case of the House of Lords

Commiss,ioner of Inland Revenue v. Hood Barrs,(') it was held that such proceedings were quasi-judicial and if the section required a notice and notice was not given there was a breach of the principles of natural justice and Certiorari lay to quash the. order made. Lord Reid at page 706 observed :- "I do not think it necessary in this case to decide what degree of formality, if any, is re-quired in proceedings before General Commis-sioners, for this at least is clear: no tribunal, however informal, can be entitled to reach a decision against any person without giving to him some proper opportunity to put forward his case. It may well be that these Commis-sioners acted in good faith and with the best intentions, but that is not enough."

A simlar view was also expressed by this Court in Sinha Govindji v. Deputy Chief Controller of Im-ports & Exports.(') It is more so in this case where the proviso to section 35 itself makes it incumbent upon the Income-tax Officer to give notice and a hearing to an assessee when the effect of the rectifica-tion would be the enhancement of the assessment. The learned counsel for the Department raised the forlorn argument that the addition of penal interest is not enhancement of assessment as stated in the proviso. We do not see what else it could be. The word "assessment" is used in the proviso not as an equivalent of the tax calculated at the rate given in the Finance Act but the total amount which the assessee is required to pay. The proviso applies whenever the effect of the order is to touch the pocket of the assessee and in our opinion this was such a 1962 case.

M. Chockalingam v. In the result the appeals, are allowed. A writ Commissioner of of Certiorari will issue and the order of the Income-fncomt-tax, Madras tax Officer will be quashed. The Income-tax Officer Hidayatullah, J. will, however, be free to take such action as may be open to him. In the circumstances of the case, the parties will bear their costs here and in the High Court.

Appeals allowed.

THE COMMISSJONER OF INCOME-TAX, 1962

BOMBAY CITY II, BOMBAY October, 12. v.

M/s. JADAVJI NARSIDAS & CO.

(J. L. KAPUR, A. K. SARKAR and M.

HIDAYATULLAR, JJ.)

Income Tax-Set-off-Profits of regi•tered firm and· loss incurred in unregistered firm-Findings of Tribunal-When binding on High Court-Indian Income-tax Act, 1922 (11 of 1922), SS, 24, 66 (2).

The respondent, a fir:n consisting of fonr partners, was registered under the Indian Income-lax Act, I 922. For the assessment year 1946-4 7 it claimr.d to set off a sum of Rs. 1,05,641, as its share of the loss in respect of certain transactions said t? have beei: carried on i~ the name of D by another partnership be'.".'een '.t and D, wh1~h was not registered.

The income-tax au~honU~s reJe~t.ed the clallll and the Appellate Tribunal a~reed with theu decmon on the grounds (1) that it being admitted that the ankdas were in the name of D there was no satisfactory evidence that the assessee did business' in the joint account, and (2) that, in any case, the asi:;essee could not claim the set-off as the loss was suffered by an unregistered firm.

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 37 to 40 of 1962.

Appeals from the judgment and order dated September 30,1958, of the Madras High Court in Writ Petitions Nos. 501, 502, 514 and 515 of 1956.

K.N. Rajagopal Sastri and M. 8. K. Ayyangar, for the appellants.

Gopal Singh, R. N. Sachthey and P. D. Menon, for the respondents.

1962. October 12. The Judgment of the Court was delivered by J. HmAYATULLAH, ].-These are four appeals Hitfoyatulloh, filed by two brothers Chockalingam and Meyyappan

against a common judgment of the High Court of Madras dated September 30, 1958, by which the High Court dismissed four petitions under Article 226 of the Constitution filed by them. Each of the appel-lants had filed two such petitions for the assessment years 1951-52 and 1952-53 in respect of which they were ordered to pay penal interest under section 18 A (8) of the Income-tax Act. The High Court certified the cases as fit for appeal to this Court and 1962 hence the present appeals.

M. Chockalingam v. The facts are these. Chockalingam and CominissioneT of Meyyappan are the sons of one Meyyappa Chettiar. lncome-1~ax, Madras At first the assessment was on the Hindu Undivided Hidai•atullah, J. Family but by an order of the High Court <lated was December 5, 1949, a partial partition in the family

recognised from the assessment years 1940-41.

It is not necessary to narrate the events that transpired after the decision of the High Court. The judgment of the High Court was given effect to after 1953 and the assessments for the years 1951-52 and 1952-53 made on the brothers as individuals were completed on July 11, 1953, and August 30, 1954, respectively for the two years. The appellants had not paid advance tax according to their own estimate of the income for these two years and they were liable to penal interest under section 18A (8) of the lncomc-tax Act. The Income-tax Officer, Karaikudi, over-looked this fact and did not add penal interest to the tax leviable. In 1956 the Income-tax Officer started proceedings under section 35 of the Income-tax Act for the rectification of the assessment. No notice was sent to either brother and the Income-tax Officer ordered the levy of penal interest as follows :-

I. On Choclcalingam

1951-52 Rs. 13,391-7-0 1952-53 Rs. 8,281/- II. On Meyyappan

1951-52 Rs. 13,440-11-0 1952-53 Rs. 8,254-6-0 There is no appeal against the order under section 35, Income-tax Act. The appellants therefore applied under section 33A to the Commissioner of Income-tax for revision of t!tCJsc orders. We were told at the hearing that they were not heard by the 1962 Commissioner. They were informed by the Income-M. Chockalingam tax Officer by a letter dated April 9, 1956, that their

v. applications were rejected. As there was no further Commiuiot14r of remedy, the appellants filed four petitions under lncoma·ltVt, Madras

Article 226 of the Constitution, challenging the Hidts1atullah, J. orders of the Income-tax Officer and the Commissioner

of Income-tax on the ground that they were opposed to the principles of natural justice. Before the High Court it was cG>ntended by the Department that there was a patent failure on the part of the Income-tax Officer to add penal interest to the tax, which he could rectify under section 35 as an error apparent from the record. This contention of the Department was accepted and the High Court dismissed the peti-tions because in its opinion there was no substantial but a 'procedural' defect and the failure to issue the notice caused no prejudice because the result would have been the same even if the notice had been issued. In our opinion, and we say it respectfully, the High Court was in error in holding that there was no breach of the principles of natural justice in this case and the High Court ought to have quashed the orders.

Section 35 which deals with the rectification of mista~es provides that the Income-tax Officer (among other officers) may at any time within four years from the date of any assessment order etc. passed by him, on his own motion rectify any mistake apparent from the record of the assessment and shall within the like period rectify any mistake which has been brought to his notice by an asscssee. One of the provisos says that no such rectification shall be made, having the effect of enhancing an assessment or reducing the refund unless the Income-tax Officer has given notice to the asscssec of his intention so to do and has allow-ed him a reasonable opportunity of being heard.

Section lSA wl1ich w;is imerted by the Income-tax Amendment Act, 1914 (11 of Hl44) provid~s for advance payment of tax by an assessee. Sub-1962 section ( 8) of that section says that where, on making M. Glwckaliniam the regular assessment, the Income-tax Officer finds v. that no payment of advance tax has been made in Commissioner of Income-tax, Madn accordance with the previous provisions of that section, interest calculated in the manner laid down Hidayatullah, J. in sub-section (ti) shall be added to the tax as determined on the basis of the regular assessment.

Sub-section (6) says that if in any year an assessee has paid advance tax under sub-section (2) or (3) on the basis of his own estimate and the tax so paid is less than eighty per cent of the tax determined on the basis of the regular assessment, so far as such tax relates to income to which the provisions of section 18 do not apply, and if it is not due to any variation in the rate of tax, simple interest at the rate of six per cent per annum from the 1st day of January in the year in which the tax was paid up to the date of the said regular assessment, is payable by the assessee on the amount by which the tax paid falls short of the eighty per cent. A number of provisos are added to sub-section ( 6) and the fif~h proviso says:-

"Provided further that in such cases and under such circumstances as may be prescribed, the Income-tax Officer may reduce or waive the interest payable by the assessee."

"Prescribed" means prescribed by rules made under the Act and rule 48 of the Indian Income-tax Ru:es, 1922, provides for the different cases and circumstances as follows :-

"4~. The I~1come-tax Officer may reduce or waive the mterest payable under section 18A in the cases and under the circumstances mentioned below, namely :- (1) Where the relevant assessment is compkted

more than one year after the submission

1962 of the return, the delay in assessment not M. Chockalingaf(l being attributable to the assessee.

v.

Con:missione~· oj (2) \'V'here a person is Ullder section 43 deemed Income-tax, Madra> to be an agent of another person and is 1-/idavatulla/l, J. assessed upon the -latter's income.

(3) Where the assessee has income from an unregistered firm to which the provisions of clause (b) of sub-section ( 5) of section 23 are applied. · ( 4) Where the "previous year" is the financial year or any year e1iding near about the close of the financial vear and large profits are made after the '15th of March, in circumstances which could not be foreseen. (5) Any case in which the Inspecting Assistant Commissioner considers that the circum-stances are such that a reduction or waiver of . the inte~est payable under section 1SA(6) is justified.

It will appear from this that the action under section 35 may be taken in favour of the taxpayer without any notice to him but if the action has the effect of enhancing an assessment or reducing the refund, the Income-tax Officer, acting under section 35, must send a notice to the asscsscc and ~ive him a reasonable opportunity . of being heard. 0 This admittedly was not done in this case. It is urged by the learned counsel for the Department that this proviso cannot apply to a case of penal interest levi· able under sub-section (S) to section ISA because that sub-section is mandatory, that the fifth proviso to section ISA (6) does not override the mandatory character of the eighth sub-section and that the writ jurisdiction was rightly not exercised by the Hig_h Court in favour of the appellants because even if notice had been given to them, penal interest would have to be added in any event since the Income-tax 1962 Officer had no option. M. Choduzlingam v. There is no doubt that the eighth sub-section Commissiotur tJf [nconu-tllJ., Mtuirt applied fo the assessment~ of the two appellants. It is also indisputable that as they had made no advance Hidayatullah, J. payment of tax the Income-tax Officer was obliged under that sub-section to calculate the interest in the manner laid down in sub-section (6) and add it to t\le tax. It has now been ruled by this Court recently in Gursahai Saigal v. The Commissioner of Income-tax, Punjab, (1) that sub-section (6) can be read with sub-section (8) inspite of certain difficulties oflanguage in applying the provisions of the former su):i-sect!on to the latter. This Court points out that the mtent10n of section l SA is to charge interest whenever the tax-payer is in default in making an advance pay-ment of tax, and that sub-section ( 6) must be read mutatis mutandis so as to advance the clear intention underlying sub-section (8) and not to defeat that intention. This being established, the question is whether sub-section. (6) must be read with all its provisos. The argument here is that according to the terms ofsub-section (8) only the "manner" of calculation can be taken from sub-section ( 6) and the fifth proviso does not lay down any 'manner of calculation'. The fifth proviso says that in certain circumstances and in certain cases the Income-tax Officer may reduce or waive interest payable by the assessee. The proviso operates after the amount of tax is determined and cuts across the sub-section. The Income-tax Officer, though em-powered to reduce or waive the interest payable by b}'. the assess~e, is controlled by the rules which pres-cribe the circumstances under which and the cases in which he can take that action. The relevant rule has ~een quoted above. All the sub-rules are equally applicable to sub-section (6) and sub-section (8).

Sub-rule ( 5) of that rule; is general in its terms and it lays down that in a case in which the Inspecting 1962 Assistant Commissioner considers that the circumstances M. CWalingam are such that a reduction or waiver of interest is

v. justified the Income-tax Officer may reduce or waive Commissionrr of the interest payable. Such a case may be where a lncome·tax, Madras

part of the tax is paid and· also a case where no tax