SAYAJI MILLS COMPANY LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under S. 66(2) of the Indian IT Act, 1922. The reference relates to a notice issued under S. 34(1)(b) of the Act against the assessee. The assessment year with which we are concerned is the year 1949 50, the accounting year being the calendar year 1949. The assessee is a company registered in the former Baroda State having its registered office at Baroda. Prior to the merger of the State of Baroda with the State of Bombay, the assessee was being assessed as a non resident by the ITO at Bombay. On 22nd July, 1949, the assessee in the usual course submitted a return of income under S. 22(2) to the ITO at Bombay for the asst. year 1949 50. On 1st Aug., 1949, the territories of the State of Baroda were merged with the territories of the State of Bombay. On 22nd Aug., 1949, the Taxation Laws (Extension to Merged States and Amendment) Ordinance (XXI of 1949) was passed whereby the Indian IT Act, 1922, and all the rules and orders made thereunder, which were in force immediately before the commencement of the Ordinance, were extended to all the merged States including the former State of Baroda. The Ordinance also introduced S. 60A in the Indian IT Act, 1922. Sec. 60A provided that if the Central Government considered it necessary or expedient so to do for avoiding any hardship or anomaly, or removing any difficulty that may arise as a result of the extension of the IT Act to the Merged States, the Central Government may, by general or special order, make an exemption, reduction in rate or other modification in respect of income tax in favour of any class of income, or in regard to the whole or any part of any class of income, or in regard to the whole or any part of the income of any person or class of persons. On 3rd Dec., 1949, in exercise of the powers conferred under S. 60A, the Central Government promulgated the Merged States (Taxation Concessions) Order, 1949. Broadly stated, under that order the income accruing or arising in the merged State was liable to be taxed at certain concessional rates. On 31st Dec., 1949, the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, was passed replacing the provisions of the Taxation Laws (Extension to Merged States and Amendment) Ordinance, 1949, in almost the same terms. After the merger of the territories of the State of Baroda with those of Bombay, the ITO at Baroda issued a notice on the assessee as a resident requiring the assessee to file a return. The said notice was issued under S. 22(2) of the Indian IT Act, 1922. On 16th Jan., 1950, the assessee filed a return. On 21st Jan., 1950, the ITO issued a notice under S. 22(4) requiring the assessee to produce certain documents on 22nd Feb., 1950. On 22nd Feb., 1950, the assessee found that the ITO was proceeding to make an assessment in respect of the entire income of the assessee at the rate prevailing in British India. Thereupon, on 24th Feb., 1950, C. C. Chokshi and Company, accountants representing the assessee, addressed a letter to the ITO stating that during the assessment proceedings it transpired that the ITO was proposing to assess the assessee at the Indian Union income tax rates and did not propose to give the assessee the benefit of the Merged States (Taxation Concessions) Order, 1949, passed by the Government of India under S. 60A of the Government of India IT Act. The assessee by the letter claimed the benefits of the provisions of the Merged States (Taxation Concessions) Order, 1949. On 28th Feb., 1950, the ITO passed an order of assessment whereunder he taxed the income of the assessee at the Indian Union income tax rates. At the end of his order, he stated as under :

(2.) ON the same day he addressed a letter to the assessee which is referred to in paragraph 3 of the statement of the case. A copy of the said letter had by mutual consent been exhibited in this reference as exhibit "A". By that letter the ITO sent two challans to the assessee. He stated that the first challan corresponded to the tax due approximately according to Baroda rates of taxes while the second challan represented the difference between the Indian rates of tax and the Baroda rate of tax. He observed that the assessee was not entitled to any concession for the asst. yr. 1949 50 under the provisions of the Merged States (Taxation Concessions) Order, 1949. He further observed that the Federation of Industries, Baroda, had approached the authorities concerned to give their decision in connection with matters of the types which had arisen in the case of the assessee and he requested the assessee to withhold payment due according to the second challan until the assessee heard from the ITO. On the 11th March, 1950, the Central Government added cl. 6A to the Merged States (Taxation Concessions) Order, 1949, whereunder it was provided that the income, profits and gains of any previous year, referred to in paragraph 5 or 6 of that order, which accrued or arose without the taxable territories to a person who was resident but who would not be a resident in the taxable territories if the Act had not been passed, would be charged to tax in the same manner and to the same extent as specified in paragraph 5 or 6, as the case may be. The effect of this amendment was to clear all doubts that might have been occasioned whilst interpreting the provisions of the Merged States (Taxation Concessions) Order, 1949, and to lay down on clear terms that the case of persons who are liable to be regarded as resident by reason of the provisions of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949. They would for the period provided in the Merged States (Taxation Concessions) Order, 1949, be liable to tax in respect of the income which accrues within the territories of the merged States at the rate prevailing in the Merged States immediately prior to the coming into force of the Act. The assessee on 29th March, 1950, preferred an appeal against the order of the ITO before the AAC contending, inter alia, that the ITO had erred in not applying the provisions of the Merged States (Taxation Concessions) Order, 1949. On 25th April, 1950, the ITO addressed a letter to the assessee for the purpose of rectification of the order passed by him on 28th Feb., 1950. In that letter he has stated as follows : To enable this office to give effect to the provisions of the Merged States (Taxation Concessions) Order of 1949, dt. the 3rd Dec., 1949, as amended by Notification No. 22(4) IT/49, dt. the 11th March, 1950, in respect of the already completed assessment for 1949 50, you are hereby requested to please attend the office of the ITO, Ward A, Baroda, on 3rd May, 1950, at 11.00 a.m. with the following information :

(3.) CLAUSE (2) relates to a matter to which we will advert subsequently. After obtaining the requisite sanction the ITO reopened the assessment under S. 34(1)(b) by his notice dt. 9th Feb., 1951. In view of the fact that the provisions of the Merged States (Taxation Concessions) Order, 1949, had been applied in the case of the assessee, the assessee on 20th Feb., 1953, withdrew one of the grounds of appeal before the AAC whereby the assessee had contended that the ITO had erred in not applying the provisions of the Merged States (Taxation Concessions) Order, 1949, to the assessee. On 21st Dec., 1953, the appeal before the AAC was disposed of. On 24th March, 1954, assessment order was made by the ITO acting under the provisions contained in S. 34. Under that order he held that the sale proceeds to the tune of Rs. 21,27,293 which represented the sale proceeds received by cheques on British Indian banks were received by the assessee in the taxable territories and profits relating thereto were taxable at the Indian Union rates. The assessee preferred an appeal against the order of assessment passed as aforesaid before the AAC. When the appeal reached hearing, the assessee sought permission to add an additional ground of appeal urging that the proceedings initiated under S. 34 by the ITO were void as no new information had come to his notice so as to enable him to start proceedings under S. 34(1)(b). The AAC permitted the assessee to urge that ground and ultimately held in favour of the assessee on that ground. The matter was carried further before the Tribunal. The Tribunal on 3rd April, 1957, reversed the order of the AAC and came to the conclusion that the ITO was entitled to take proceedings under S. 34. The assessee applied to the Tribunal under S. 66 of the Indian IT Act, 1922, to refer a question of law arising out of the order of the Tribunal for decision by the High Court, the question of law being :