Madras High Court
A.K.M. Govindaswamy Chettiar (Decd.) ... vs Income-Tax Officer on 30 April, 1998
Equivalent citations: [2000]244ITR559(MAD)
JUDGMENT N.V. Balasubramanian, J.
1. The assessee, A. K. M. Govindaswamy Chettiar, Dindigul, was an individual and a resident in India. He died during the course of reference proceedings and his legal representatives were brought on record. The assessee derived income from business and properties in India. He was also having share income from firms in Kuala Lumpur and Singapore and income from store at Ipoh. The original assessment in the case of the assessee for the assessment year 1974-75 was completed on an income of Rs. 1,00,030 on July 26, 1975, and after the completion of the original assessment, there was an audit objection pointing out that there were remittances received by the assessee during the previous year relevant to the assessment year 1974-75 of an extent of Rs. 1,50,000 on various dates and a sum of Rs. 1 lakh, received in the earlier assessment year were taxable and these two assessments required revision on that account. The Income-tax Officer did not reopen the assessment at once and he required the assessee to furnish particulars regarding credits disclosed and furnished in the books of account maintained by him. The Income-tax Officer requested the assessee to produce the details. The assessee explained the credit to the extent of Rs. 1.50 lakhs arising out of debts in, the accounts of the foreign firms to the extent of Rs. 1 lakh during the previous year. The Income-tax Officer noticed a similar credit of Rs. 1 lakh even in an earlier year and found that there was no correlation in respect of a sum of Rs. 50,000 and there was not even a corresponding debit entry in respect of another amount of Rs. 50,000 in the foreign firm. The Income-tax Officer directed the Inspector to enquire with the bank about the details and the Inspector of Income-tax conducted an enquiry and found that the last draft on December 26, 1973, was not even a foreign draft and the source was not traceable. The assessee furnished a certificate of the chartered accountants during the enquiry and the certificate also did not confirm that the alleged draft received on December 26, 1973, was received from abroad. The Income-tax Officer found that the sum of Rs. 1 lakh received during the immediately preceding year and credited in the personal accounts would not have been available to explain the source of the credits during the year. Armed with the above details, the Income-tax Officer initiated proceedings for reassessment on the ground that there was no source to cover the debit in foreign books for the alleged remittance of Rs. 50,000 credited in the assessee's books on December 26, 1973, and to that extent there was an escapement of income during the relevant previous year. The Income-tax Officer initiated the proceedings within four years from the end of the relevant previous year and, therefore, he did not get the approval of the Commissioner of Income-tax. After the notices were issued, the assessee filed a petition before the Inspecting Assistant Commissioner under Section 144A of the Income-tax Act, seeking intervention of the Inspecting Assistant Commissioner on the ground that there was no escapement of income as the total debits in the foreign accounts were more than enough for remittance of Rs. 1,50,000 in India. The Income-tax Officer found, on scrutiny of accounts, particularly the remittance made from abroad that there was an excess credit of Rs. 50,000 for which there was no debit in the foreign books of account, and, accordingly, he completed the assessment treating the unexplained credit in India of Rs. 50,000 on December 26, 1973, as the income from other sources under Section 68 of the Act and there was no debit in the foreign accounts for the remittance of Rs. 50,000 in the Indian books of account on December 26, 1973.
2. The assessee went on appeal before the Commissioner of Income-tax (Appeals) against the order of reassessment. Several contentions were raised on behalf of the assessee. The Commissioner of Income-tax (Appeals) held that the notice under Section 148 of the Act was served on the agent of the assessee. though not a power agent and rejected the plea of the assessee that there was no valid service of notice on the assessee. The Commissioner of Income-tax (Appeals) also rejected that there were materials to reopen the assessment and the assumption of jurisdiction of the Income-tax Officer under Section 147(b) of the Act was justified. The Commissioner of Income-tax (Appeals) also held that on the merits of the case, there was no satisfactory explanation produced by the assessee and the Income-tax Officer has rightly assessed the same as the income of the assessee under Section 68 of the Act. In this view of the matter, the Commissioner of Income-tax (Appeals) dismissed the appeal preferred by the assessee.
3. The assessee carried the matter further by setting an appeal before the Income-tax Appellate Tribunal and repeated the same contentions which were urged before the Commissioner of Income-tax (Appeals). The Appellate Tribunal also held that the notice under Section 148 of the Act was validly served. The Tribunal noticed that different persons were acting as agents in the absence of the power agent of the assessee and there was no exclusive agent. That apart, according to the Tribunal, the service was acknowledged on March 24, 1979, by the authorised representative of the assessee asking for time to file the return and the Tribunal also noticed that the very form issued by the Income-tax Officer was returned to the officer on March 6, 1980, along" with a covering letter and thus the notice was complied with. The Tribunal noticed that the contention of the Revenue that there was no objection either before the Assessing Officer or even before the Inspecting Assistant Commissioner that there was no valid service on the assessee and the jurisdiction was questioned only before the Commissioner of Income-tax (Appeals) after the decision of this court in the case of jayanthi Talkies Distributors v. CIT [1979] 120 ITR 576. The Tribunal noticed the fact that there had been receipt of the notices by the same person in the past through the same process server and such past notices were complied with. The Tribunal, then came to the conclusion that the notice under Section 148 of the Act was validly served and the decision of this court in jayanthi Talkies Distributors' case [1979] 120 ITR 576 has no application to the facts of the case. The Tribunal also upheld the assessment on the merits of the case on the ground that for credit entry made on December 26, 1973, there was no draft received from the foreign firm and there was no corresponding debit in the books of the foreign firm. The Tribunal also noticed, the enquiry made with the banker and held that if the money came from abroad, it would have been necessary for the assessee to explain the source as he is the recipient and there was no explanation in so far as the source of the receipt. The Tribunal held that the Income-tax Officer was justified in holding that the sum of Rs. 50,000 was assessable under the head "Other sources". The Tribunal, therefore, dismissed the appeal referred by the assessee.
4. On an application filed by the assessee, the Tribunal rejected the questions of law and on the basis of the direction of this court in T. C. P. No. 286 of 1983 dated November 14, 1983, the Appellate Tribunal referred to us the following' questions of law for our consideration :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the notice dated March 24, 1979, issued under Section 148 was validly served on the assessee ?
2. If the answer to the first question is in the affirmative, whether the Tribunal was right in law in upholding the reassessment proceedings under Section 147 of the Act ?"
5. Mr. T. V. Ramanathan, learned counsel for the assessee, very forcibly argued that there was no finding that the notice was served on a registered or authorised agent of the assessee. According to learned counsel for the assessee, the assessee had one A. K. Angusamy, as his power agent, and when it is not the case that it was served on the said Angusamy who was the authorised power agent, but served on some other person, the service of notice was not valid. He submitted that the Tribunal has not recorded any finding on whom the notice was served and as the finding of the Appellate Tribunal was that different persons, viz., Angusamy, Thangarajan and Balraj, were acting as the agent and in the absence of any further finding that it was served on any one of them, the order of the Appellate Tribunal holding that there was a valid service of notice under Section 148 of the Act is not sustainable in law. He referred to the principles of Section 148 of the Act and submitted that there must be a valid service of notice to reopen the assessment and in the absence of any service on the assessee or on his power agent authorised in writing, the service of notice on an unauthorised person is not valid in law. He also submitted that earlier notices were notices under Section 210 or 273 or 274 of the Act and they would involve no action on the part of the assessee except the payment of advance tax or to send a reply to notices under Section 273 or 274 of the Act. He further submitted that those notices were not having legal consequences and in so far as the notice under Section 148 of the Act was concerned, he submitted that there must be a valid service of notice and without a valid service of notice, the reassessment proceeding initiated was not valid in law. He submitted that the fact that the notice reached the assessee is not good enough to assume that there was a valid service of notice and the subsequent conduct of the assessee cannot form a good ground to show that there was a valid service of notice on the assessee and that would not cure the defective service of notice on an unauthorised person. He submitted that the decision of this court in Jayanthi Talkies Distributors' case [1979] 120 ITR 576, squarely applied to the facts of the case and admittedly the notice was not served on the authorised agent and the notice was not served on other persons as noticed by the Appellate Tribunal. He, therefore, submitted that the service of notice was not validly effected by the Department and, therefore, the entire proceedings must be held to be bad. He also submitted that there is no estoppel and the mere fact that the assessee has not raised the objection earlier would not prevent the assessee to raise the objection before the appellate authority and it is for the Department to prove positively that the service was validly made. Mr. T. V. Ramanathan, learned counsel for the assessee, relied on the decision in Thangam Textiles v. First ITO , and submitted that merely because the assessee filed an objection to the notice, it cannot be stated that there was a valid initiation of reassessment proceeding's and the service of prescribed notice on the assessee is a condition precedent for the validity of any reassessment under Section 147 of the Act. Learned counsel for the assessee submitted that the decision of this court in the case of N. Bella Gowder v. Tahsildar [1969] 71 ITR 26, is distinguishable and that case was not a case under Section 148 of the Income-tax Act, but a case relating to the proceedings for recovery of certain amount from the director and in that context, this court held that when a person was aware of the recovery proceedings, the non-service of the notice under Rule 2 of Part I of the Second Schedule to the Income-tax Act, 1961, would not vitiate the proceedings. Learned counsel for the assessee strongly relied upon a decision of this court in S. B. Muthumunia Mudaliar v. Commissioner of Agrl. I. T. [1972] 85 ITR 12 and submitted that mere participation in the proceedings would not be sufficient as the sine qua non for the reassessment is valid service of notice. He, therefore, submitted that merely because the assessee participated in the proceedings would not be sufficient to hold that there was a valid service of notice. He also invited our attention to the decision of a Full Bench of the Assam High Court in Tansukhrai Bodulat v. ITO [1962] 46 ITR 325, and submitted that the issue of a valid notice is not a mere procedural requirement but is a condition precedent for the exercise of the jurisdiction of the Income-tax Officer to reopen the assessment proceedings. Learned counsel for the assessee placing reliance on the decision of the Bombay High Court in the case of CIT v. Ramsukh Motilal [1955] 27 ITR 54, and held that by merely filing a return under protest, it cannot be stated that the assessee had waived his right to contend that the proceedings are without jurisdiction and illegal. He also referred to the decision of this court in General Commercial Corporation Ltd. v. CIT [1966] 62 ITR 459, and submitted that if the notice is not served in the manner prescribed in the Act, it will go to the root of the matter and that cannot be waived. He submitted that unless it is established that the notice was served on the direction of the assessee on the person who received the notice, the notice served on a third party cannot be regarded as a valid service of notice.
6. Learned counsel for the Revenue, on the other hand, relied upon a decision in the case of CIT v. Bhanji Kanji's Shop [1968] 68 ITR 416 (Guj), and submitted that where a return has been filed by the assessee in pursuance of the notice served on his temporary employee, it can be held that the reassessment proceeding was properly initiated. He submitted that any irregularity will not vitiate the proceedings and in support of his submission, learned counsel for the Revenue placed reliance on a decision of the Patna High Court in the case of Mahendra Kumar Agrawalla v. ITO [1976] 103 ITR 688, and the decision of the Madhya Pradesh High Court in the case of Dr. H. R. Rai v. CIT [1984] 145 ITR 809. In so far as the decision of this court in Thangam Textiles v. First ITO [1973] 90 ITR 412, is concerned, he submitted that though objection was taken before the Income-tax Officer that the notice served was not legal and valid, the assessee filed a writ petition challenging the notice. He submitted that on the facts of the instant case, the assessee has not raised any objection before the Income-tax Officer and even after the completion of the reassessment proceedings, no objection was raised and only at the time of hearing of the appeal before the Commissioner of Income-tax (Appeals), the assessee has raised objection regarding the ,validity of service of notice. Learned counsel for the Revenue further submitted that the decision of this court in Jayanthi Talkies Distributors v. CIT [1979] 120 ITR 576, is distinguishable on the facts of the case.
7. Mr. T. V. Ramanathan, learned counsel for the assessee, in his reply, submitted that the decisions in CIT v. Kar Valves Ltd. ; Mahendra Kumar Aarawalla v. ITO [1976] 103 ITR 688 (Patna) and Dr. H. R. Rai v. CIT , are not applicable to the facts of the case as in those cases the assessee accepted the notice, but in the instant case, the assessee was not even aware of the reassessment notice as he was not in India and when there was no conscious acceptance of the notice, the decisions relied upon by learned counsel for the Revenue have no application to the facts of the case. Learned counsel for the assessee placed strong reliance on a decision of the Gujarat High Court in P. V. Doshi v. CIT [1978] 113 ITR 22, and submitted that the service of notice is a mandatory requirement and cannot be waived by the assessee.
8. Before considering the rival submission, it is necessary to mention here that learned counsel for the assessee has not seriously disputed the addition made in reassessment proceedings. The facts also clearly show that the credit entry of Rs. 50,000 was found in the assessee's books of account on December 26, 1973. It was found that it was described as a draft received from A. K. Muthan Chettiar and Sons, Kuala Lumpur, and that was found to be incorrect and there was no corresponding debit entry in the books of account of the foreign firm. The Appellate Tribunal examined the entire transactions of debits and credits and found that there was no corresponding' debit entry in the foreign accounts for the credit made on December 26, 1973. The Appellate Tribunal found that the Income-tax Officer had conducted the enquiry with the bank and the enquiry also revealed that there was no remittance from abroad. The further finding of the Appellate Tribunal was that there was no explanation by the assessee regarding the credit in his personal accounts and, therefore, the Tribunal, on the basis of materials came to the conclusion that the addition of Rs. 50,000 shown as credit in the current accounts of the assessee was justified. We find no error in the order of the Appellate Tribunal and, accordingly, the finding on addition of Rs. 50,000 is sustainable.
9. The only question that remains to be considered is whether there was a valid service of notice. The Tribunal recorded a finding that the notice under seption 148 of the Act was served and acknowledged by a person whose signature is not legible. The Tribunal found that the acknowldge-ment is dated March 24, 1979, and the initials of the person who acknowledged the notice probably are M. R. V. with his name starting with the letter "S". It was also found that there was a similar notice under Section 210 which was received by the same person and the notice was also complied with. The Tribunal also recorded a finding that notices under Sections 273 or 274 of the Act for the assessment years 1973-74 and 1974-75 were served on August 6, 1975, on the same person and that person clearly noted behind the notice "A. K. M. G.". The Tribunal, on perusal of the records, came to the conclusion that there were instances of service on the same person and came to the conclusion that it cannot be stated that only Thangarajan, Balraj and Angusamy were the only authorised agents to receive the notice. The finding of the Appellate Tribunal makes it clear that it cannot be stated that only A. K. Angusamy was the power agent to receive the notices as contended by the assessee. The assessee's representative has also asked for time to file the return and at that time, there was no objection by the assessee that the service of notice was not valid and proper. The assessee while filing the return on March 6, 1980, returned the same form issued by the Income-tax Officer which itself clearly shows that the notice reached the assessee. There was no objection by the assessee cited before the Income-tax Officer or, before the Inspecting Assistant Commissioner as to the validity of the service of notice.
10. In this factual situation, the question that has to be considered is whether the service of notice under Section 148 of the Income-tax Act was valid and proper. There is no dispute that under Section 148 of the Income-tax Act, the issue of notice as well as service of notice under Section 147 on the assessee is a condition precedent to the validity of the reassessment proceedings under Section 148 of the Act. The service on the assesses in a manner known to law and in accordance with the law is a sine qua non for the valid initiation of the reassessment proceeding's. The decision of the Supreme Court in the case of Y. Narayana Chetty v. ITO [1959] 35 ITR 388, though rendered under the Indian Income-tax Act, 1922, would equally apply to the proceedings under Section 147 of the Act. Therefore, the service of the notice prescribed under Section 148 of the Act, as held by the apex court in Y. Narayana Chetty's case [1959] 35 ITR 388, is a condition precedent to the validity of any reassessment under Section 34 of the Act of 1922 (corresponding to Section 148 of the Income-tax Act, 1961). A Full Bench of the Assam High Court in the case of Tansukhrai Bodulal v. ITO [1962] 46 ITR 325, is also an authority for the proposition that issue of a valid reassessment notice is a condition precedent and it is not a mere procedural requirement for the exercise of the jurisdiction of the Income-tax Officer to reassess the income of the assessee under Section 148 of the Act and there can be no waiver of the notice under Section 147 of the Act, as such the service of notice is a condition precedent for the exercise of jurisdiction to assess the income under Section 147 of the Act.
11. In Thangam Textiles v. First ITO [1973] 90 ITR 412, this court held that there is no difference between the old Act and the new Act in regard to the reassessment proceedings, and it was held that notice under Section 148 is a foundation for the initiation of reassessment proceedings and a condition precedent for the validity of the reassessment. This court also rejected the contention that merely because the notice was addressed to the asses-see, would not establish that there was a valid service of notice and unless the notice was served in the prescribed manner, the service was held to be insufficient. This court followed a decision of the Mysore High Court in the case of C. N. Nataraj v. Fifth ITO [1965] 56 ITR 250, and held that the service should be in accordance with the provisions of the Act and unless the provisions relating to the mode of service are strictly complied with, the reassessment proceeding would be without jurisdiction. A similar view was also taken by a learned judge of this court in S. P. Muthumunia Mudalliar v. Commr. of Agrl I. T. , wherein the learned judge held that the sine qua non for action under Section 35 of the Madras Agricultural Income-tax Act, 1955, is that the officer should believe that there has been an escapement of income and the mere fact that the asses-see participated in the proceedings would not validate the said proceedings of assessment passed pursuant thereto, when the records do not disclose that the condition precedent for initiation of proceedings under Section 35 was present.
12. Learned counsel for the assessee refers to Order 3, Rule 1 of the Code of Civil Procedure which provides for appearance by a recognised agent or by a pleader. He also refers to Order 3, Rule 6(2) of the Code of Civil Procedure which provides for appointment of a recognised agent and the said sub-rule lays down that the said appointment shall be made by an instrument in writing' signed by the principal, and such instrument or a certified copy thereof shall be filed in court if the appointment is general. He, therefore, submitted that only on the filing" of a written instrument with the Income-tax Officer, the agent was empowered to receive notice on behalf of the assessee and, therefore, the notice served on M. R. V. was not valid at all. We are, however, unable to accept the contention of learned counsel for the assessee as under Order 5, Rule 12, wherever it is practicable, service shall be made on the defendant in person, unless he has an agent empowered to accept service, in which case service on such agent shall be sufficient. Under Order 5, Rule 13, in a suit relating to any business or work against a person who does not reside within the local limits of the jurisdiction of the court from which summons was issued, the service on any manager or agent, who was personally carrying on such business or work for such person within the limits of the court's jurisdiction should be deemed to be a good service. Admittedly, the assessee was not within the local limits of the jurisdiction of the Income-tax Officer, but the business was carried on within the local limits of the jurisdiction of the Income-tax Officer. In such situation, the service on the manager or agent who was personally carrying on the business on behalf of the assessee would be sufficient, In the instant case, we have seen that there are more than one person who have been receiving notices under the Income-tax Act and different persons have acted in the absence of the power agent to receive notice. The assessee was having business in India and when the notice was served through the process server of the Income-tax Department, the notice is deemed to have been served as it can ordinarily be expected that the process server knew the person on whom the service was effected. Further, it is also not the case of the assessee that he had filed necessary authorisation forms empowering only A.K. Angusamy to receive notice on his behalf. Therefore, the notice served on the person who was receiving the notices cannot be said to be, on the facts and in the circumstances of the case, invalid. It is no doubt true that there should be valid service of notice and the notice has to be served in terms of the Code of Civil Procedure and the mere fact that the recipient was representing the assessee, would not be sufficient to hold that he was authorised to receive notice. But, on the facts of the case, subsequent conduct of the assessee in not raising any objection regarding the validity of the service of notice, the request for extension of time to file return and the assessee's readiness in filing the return in compliance with the notice should all be taken into account in considering the question whether there was a valid service or not.
13. A decision of this court in Jayanthi Talkies Distributors v. CIT [1979] 120 ITR 576, on which great reliance was placed by counsel for the assessee is distinguishable. In that case, the assessee was a firm and notice was served on Balakrishna Filial and it was found that the services of Balakrishna Pillai were terminated at the time of service of notice under Section 148 of the Income-tax Act. Further, there was no compliance with notice under Section 148 of the Act by filing a return on behalf of the firm and in that factual matrix, this court held that (page 581) "the mere fact that a person had accepted notices on behalf of the assessee on previous occasions and appeared for the assessee would not constitute him an agent on whom a notice or requisition under the Act would be validly served, nor would any statement made by him bind the assessee". In our opinion, the judgment of this court in Jayanthi Talkies Distributors' case [1979] 120 ITR 576, is distinguishable as it was found that the service was effected on an un-authorised person to receive the notice. On the other hand, in the instant case, the notice has been served on a person who had been receiving" notices on behalf of the assessee and the assessee in the instant case would have known the person who initialled for service of notice as M. R. V. with his name starting with the letter "S". But the assessee has not taken any step to establish before the first appellate authority the person who received the notice and whether the recipient was not authorised to receive notice. The case of the assessee was that only A. K. Angusamy was his power agent. But, the contention of the assessee was rejected by the Appellate Tribunal on the ground that there was no exclusive agent and more than one person had been acting as an agent of the assessee. In such a situation, it is the duty of the assessee to establish before the authorities the person who received the notice as the notice found its way to the assessee and also to establish that the recipient was not authorised to receive notice.
14. The Tribunal relied upon Order 5, Rule 12 of the Code of Civil Procedure which reads as under : "Wherever it is practicable, service shall be on the defendant in person, unless he has an agent empowered to accept service, in which case service on such agent shall be sufficient". There is no dispute that the assessee was residing outside India and there were more than one person who had received notices on behalf of the assessee and the notice was complied with and the assessee has not raised any objection either before the Income-tax Officer or before the Inspecting Assistant Commissioner but raised objection only before the first appellate authority. In this factual situation, we are of the opinion that the Tribunal was correct in holding that the service of notice under Section 148 of the Act was validly effected on the assessee.
15. We have already seen the decision of this court in General Commercial Corporation Ltd. v. CIT [1966] 62 ITR 459, wherein this court held that the service must be deemed to have been effected validly on the principal officer when the notice was served on the person who was authorised to receive notice or at any rate, the receipt by him had been acknowledged on behalf of the principal officer subsequently. The ratio of the above decision is that if the receipt of the notice has been acknowledged subsequently, that would constitute a valid service of notice on the company.
16. The Gujarat High Court in the case of CIT v. Bhanji Kanji's Shop [1968] 68 ITR 416, held that where the return has been filed by the assessee in pursuance of the notice served on the temporary employee; it must be held that the notice was received by him and the reassessment proceedings were properly initiated. The Patna High Court in Mahendra Kumar Agrawalla v. ITO [1976] 103 ITR 688, has also taken the same view and held that though the notice under Section 148 of the Act was served on the clerk who was not authorised to receive the notice on behalf of the asses-see, when the assessee and his brothers acted on that notice, the reassessment proceedings cannot be held to be invalid for want of proper notice. The Madhya Pradesh High Court in Dr. H. R. Rai v. CIT [1984] 145 ITR 809, has taken the same view and held that the service of notice was valid though the person on whom the notice was served was not authorised to receive notice, when the assessee participated in the reassessment proceedings without any objection and the irregularity in the service of notice would not invalidate the assessment proceedings. We are in respectful agreement with the views expressed by the Gujarat High Court, Patna High Court and Madhya Pradesh High Court in the cases cited above. The assessee in the instant case did not raise any objection at any time before the Income-tax Officer that the notice was not served on the assessee personally or was not served on the agent who was empowered to receive notices. The objection raised regarding the validity of service of notice has lost its significance when the assessee acted upon the notice, filed the return in pursuance of the reassessment notice and participated in the reassessment proceedings. We, therefore, hold that the Tribunal has come to the correct conclusion in holding that the notice under Section 148 of the Act was validly served on the assessee. We have already held, on the merits of the case, that the addition made in the reassessment proceedings was justified. Accordingly, our answer to both the questions of law referred to us is in the affirmative and against the assessee. However, in the circumstances of the case, there will be no order as to costs.