MEREDITH, J. -
(1.) THE question which has been referred to us by the Income-tax Appellate Tribunal as a point of law for decision is :-
Whether in the circumstances of this case proceedings under Section 34 in respect of they assessment year 1939-40 were validly initiated and completed against the Hindu undivided family, which had ceased to exist then, and an order under Section 25A(1) accepting the partition of the Hindu undivided family had already been passed.
(2.) THIS question has been referred upon the application of one Laxmi Narain Bhadani under Section 66(1) of the Income-tax Act. Mr. Bhadani and his brother and son constituted formerly a Hindu undivided family, and were assessed in that status for income-tax up to the end of the assessment year 1939-40. In the course of assessment for 1940-41, partition was claimed and the Income-tax Officer, after necessary enquiries, by an order dated the 9th of February, 1941, under Sections 25A, accepted the claim of partition. During 1943-44 the Income-tax Officer discovered that the Hindu undivided family had been under assessed for 1939-40, which fact was not disputed. Thereupon he took action under Section 34. Notice under that sections was issued in the name of the Hindu undivided family and served upon Mr. Laxmi Narain Bhadani, who had previously been the karta. Mr. Bhadani filed his return in response to the notices under Sections 22(4) and 23(2), and thereupon a supplementary assessment was made.
Thereafter Mr. Bhadani raised the question before the Appellate Assistant Commissioner, and subsequently before the Appellate Tribunal, whether proceedings under Section 34 could be taken in the case of a Hindu undivided family no longer existing. This contention was rejected both by the Assistant Commissioner and the Tribunal.
Before us it has been repeated by Mr. B. N. Jain on behalf of Mr. Bhadani, and it has further been argued as arising upon the question submitted, that the proceedings were in any event not validly initiated since notice should have been issued and served upon each member of the defunct Hindu undivided family.
It is desirable to quote the two relevant sections. They are as follows :-
Section 25A. (1) Where, at the time of making an assessment under Section 23, it is claimed by or on behalf of any member of a Hindu family hitherto assessed as undivided that a partition has taken place among the members of such family, the Income-tax Officer shall make such inquiry there into as he may think fit, and, if he is satisfied that the joint family property has been partitioned among the various members or groups of members in definite portions he shall record an order to that effect :
Provided that no such order shall be recorded until notices of the inquiry have been served on all the members of the family.
(2) Where such an order has passed, or where any person has succeeded to a business, profession or vocation formerly carried on by a Hindu undivided family whose joint family property has been partitioned on or after the last day on which it carried on such business, profession on or after the last day on which it carried on such business, profession or vocation, the Income-tax Officer shall make an assessment of the total income received by or on behalf of the joint family as such, as if no partition had taken place, and each member or group of members shall, in addition to any income-tax for which he or it may be separately liable and notwithstanding anything contained in sub-section (1) of Section 14, be liable for a share of the tax on the income so assessed according to the portion of the joint family property allotted to him or it; and the Income-tax Officer shall make assessments accordingly on the various members and groups of members in accordance with the provisions of Section 23 :
Provided that all the members and groups of members whose joint family property has been partitioned shall be liable jointly and severally for the tax assessed on the total income received by or on behalf of the joint family as such.
(3) Where such an order has not been passed in respect of a Hindu family hitherto assessed as undivided, such family shall be deemed, for the purposes of this Act, to continue to be a Hindu undivided family.
Section 34. (1) If in consequence of definite information which has come into his possession the Income-tax Officer discovers that income, profits or gains chargeable to income-tax have escaped assessment in any year, or have been under assessed, or have been assessed at too low a rate, or have been he subject of excessive relief under this Act the Income-tax Officer may, in any case in which he has reason to believe that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars thereof, at any time within eight years, and in any other case at any time within four years of the end of that year, serve on the person liable to pay tax on such income, profits or gains, or, in the case of a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of Section 22, and may proceed to assess or reassess such income, profits or gains, and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section :
Provided that the tax shall be charged at the rate at which it would have been charged had the income, profits or gains not escaped assessment or full assessment, as the case may be :
Provided further that when the income, profits or gains concerned are income, profits or gains liable to assessment for a year ending prior to the commencement of the Indian Income-tax (Amendment) Act, 1939, or where the assessment made or to be made is an assessment made or to be made on a person deemed to be the agent of a non-resident person under Section 43, this sub-section shall have effect as if for the periods of eight years and four years a period of one year were substituted.
(2) No order assessment under Section 23 or of assessment or re-assessment under sub-section (1) of this section shall be made after the expiry, in any case to which clause (c) of sub-section (1) of Section 28 applies, of eight years, and in any other case, of four years from the end of the year in which the income, profits or gains were first assessable :
Provided that nothing contained in this sub-section shall apply to a re-assessment made in pursuance of an order under Section 31, Section 33, Section 66, or Section 66A.
Section 25A(2) prescribes the procedure for assessment after an order has been made under Section 25A(1) recording the partition of the family. In brief, the Income-tax Officer is to make an assessment of the income of the joint family as such for the period in question as if no partition had taken place. Having thus arrived at the taxable income, he is then to make separate assessments on the various members pro rata in accordance with the proportion of the joint family property allotted to each. There is, however, a proviso making each ex-member jointly and severally liable for the entire tax assessed on the total joint family income. The section says that these separate assessments on the various members are to be made in accordance with the provisions of Section 23. But there is no reference to Section 34, and upon this is founded the argument that there is no provision in the Act for proceeding under Section 34 in such a case.
The fallacy in the argument, in my judgment, lies first in this that Section 34 is not an assessment section. In proceedings under Section 34 the assessment is still made under Section 23. There was, therefore, no necessity in Section 25A to refer separately to Section 34. Secondly, section 34 does provide that the Income-tax Officer shall serve on the person liable to pay the tax a notice in accordance with the requirements of Section 22(2), and thereupon the provisions of the Act shall, so far as may be, apply as if the notice were a notice issued under Section 22(2). That is to say, the provisions of Section 23 and also of Section 25A(2) shall thereupon become applicable. Hence the contention must be rejected, and it is, to my mind, quite apparent that it is open to the Income-tax Officer to proceed under Section 34 read with section 25A(2).
(3.) THERE appears to be only one decided authority upon the point, that of the Madras High Court in Commissioner of Income-tax, Madras v. K. M. N. N. Swaminathan Chettiar, and in that the view which I have just expressed has been taken.
In regard to notice, the procedure of the Income-tax Officer was in my opinion, undoubtedly defective. Under Section 34 the notice is to be issued on the person liable to pay the tax. The Hindu undivided family no longer exists, and is not liable. Under section 25A(2) it is the ex-members that are liable. That section speaks of making assessments (in the plural) upon the members. It is clear, therefore, that a notice should have been issued upon each member in order to make each liable. It has been argued before us on behalf of the Income-tax Commissioner that the notice should be on the karta as being the only person who can make the return as to the income of the former Hindu undivided family. That is clearly incorrect. After the division, different businesses of the family may have been allotted to different members, and the books relating thereto would not remain with the karta, but would be made over to each member concerned. The karta in such a case would not be in a position to make the return. The members holding the books would have to co-operative. Moreover, by the time proceedings are taken under Section 34 the karta may be dead. There is no question of any one else taking his place, and therefore, notice could only be issued upon each member. It is unnecessary upon the present reference to express any opinion as to the liability of such members as did not receive any notice. Their cases are not before us. The irregularity cannot affect the position of Mr. Laxmi Narain Bhadani as he did get the required notice and made the return without objection. Under the proviso to Section 25A(2) he is liable for the entire tax. The irregularity in the issue of notice cannot, therefore, avail Mr. Laxmi Narain Bhadani on whose behalf the reference has been made.
There was a second irregularity in the procedure of the Income-tax Officer. He not only did not initiate the proceedings under Section 34 correctly; he also failed to complete them correctly. Having made the total assessment, he did not proceed to divide it pro rata and make separate assessments as provided in Section 25A(2). He simply issued three demand notices on the three ex-members of the family in each of which the total amount of tax assessed on the Hindu undivided family was demanded. The Tribunal has itself pointed out that this was an incorrect procedure. As the Tribunal has observed however, that can be put right. Clearly the Income-tax Officer should first apportion the liability and make a proportionate demand from each member. Only if realisation from any member for any reason fails should be resort to the proviso under which each member is jointly and severally liable for the whole.