Commissioner Of Income-Tax vs Kanhaya Lal Gurmukh Singh on 16 December, 1970

Punjab-Haryana High Court

Equivalent citations: 1973 87 ITR 476 P H

Author: D Mahajan

Bench: H Singh, D Mahajan, B R Tuli

JUDGMENT

D.K. Mahajan, J.

1. At the instance of the Commissioner of Income-tax, Patiala, the Income-tax Appellate Tribunal, Delhi Bench ” C “, has referred the following questions of law for our opinion :

” 1. Whether a person should first be treated as an agent of a nonresident by an order under Section 163 of the Income-tax Act, 1961, before a notice under Section 148 can be validly issued against him ?

2. If the question No. 1 is answered in the affirmative, whether the fact that the assessec filed return as an agent of Didar Singh Chug without admitting that it was his agent, cured the assessment order of the illegality in the initiation thereof? ”

2. The relevant assessment year is 1960-61. The previous year ended on 31st March, 1960. On 9th of January, 1963, the Income-tax Officer issued a notice under Section 163 of the Income-tax Act, 1961, to Messrs, Kanhaya-lal Gurrnukh Singh (hereinafter referred to as ” the assessee-firm “) to show cause why it should not be treated as an agent of the non-resident, Didar Singh Chug. The assessee-firm did not appear in response to this notice before the Income-tax Officer. The Income-tax Officer also on the due date did not pass any order under Section 163 deciding one way or the other as to whether the assessee-firm was the agent of Didar Singh Chug. The Income-tax Officer then on 28th February, 1963, issued notice under Section 148 of the Act against the assessee-firm as the agent of the non-resident, Didar Singh Chug. This notice was served on 4th March, 1963. The assessee-firm on 9th May, 1963, filed a return under protest as agent of the nonresident, Didar Singh Chug. The income was returned as nil. A foot-note was added to the return stating that the assessee-firm was not agent of the said non-resident. The Income-tax Officer completed the assessment on 13th November, 1963. He also passed an order on that very date under Section 163 rejecting the objection of the assessee-firm that it was not the agent of Didar Singh Chug. The assessee-firm then appealed to the Appellate Assistant Commissioner but without success, A further appeal was preferred to the Income-tax Appellate Tribunal. The Tribunal took the view that in view of the change in the phraseology of Section 163, the corresponding provision of which in the old Act of 1922 was Section 43, it was incombent on the Income-tax Officer first to determine under Section 163 whether the assessee was an agent of the non-resident. As this had not been done and the determination had taken place on the day the assessment was made, the assessment proceedings were void. The decision of the Privy Council in Commissioner of Income-tax v. Nawal Kishore Kharaiti Lal, [1938] 6 I.T.R. 61 (P.C.), to which reference was made by the revenue before the Tribunal was distinguished on the ground that the phraseology of the new Act was different from that of the old Act.

3. The Commissioner of Income-tax, being dissatisfied with the order of the Tribunal, made an application under Section 256(1) of the Act and that is how the two questions of law already stated have been referred for our opinion.

4. The contention of the learned counsel for the department is that the change in the phraseology of the old Act vis-a-vis the new Act has not made any difference, and the Privy Council decision in Nawal Kishore’s case still holds the field, whereas the contention on behalf of the assessee is that the Privy Council decision has no application in view of the change brought about in the new Act. In order to appreciate these respective contentions, it is proper to set out side by side the relevant provisions of both the Acts bearing on the controversy :

1922 Act.

1961 Act.

30. Appeal against
assessment under this Act. (1) Any assessee objecting to the amount of
income assessed under section 23 or section 27, or the amount of loss
computed under section 24 or the amount of tax deter-mined under section 23 or section 27, or deny-ing his liability to be assessed under this Act, or
objecting to the cancellation by an Income-tax Officer of the registration of
a firm under sub-section (4) of section 23 or to a refusal to register a firm
under sub-sec-tion (4) of section 23 or section 26A, or to make a fresh
assessment under section 27, or objecting to any order under sub-section (2) of section 25 or section 25A or sub-section (2) of section 26 or section 28, made by an Income-tax Officer, or objecting to any penalty imposed by an
Income-tax Officer under sub-section (G) of section 44E or sub-section (5) of
section 44F or sub-section (1) of section 46, or. objecting to a refusal of
an Income-tax Officer to allow a claim to a refund under section 48, 49 or
49F, or to the amount of the refund allowed by the Income-tax Officer under
any of those sections, and any assessee, being a company, objecting to an
order made by an Income-tax Officer under subsection (1) of section 23 A, may
appeal to the Appellate Assistant Commissioner against the assessment or
against such refusal or order :…………..

246. Appealable orders.

Any assessee, aggrieved by any of the following orders of an Income-tax
Officer may appeal to the Appellate Assistant Commissioner against such order
………

(g) an order made under
section 163 treating the assessee as the agent of a non-resident.

34. (1) If

147. If

(a) the Income-tax
Officer has reason to believe that by reason of the omission or failure on
the part of an assessee to make a return of his income under section 22 for
any year or to disclose fully and truly all material facts necessary for his
assessment for that year, income, profits or gains chargeable to incorae-rtax
have escaped assessment for that year, or have been under assessed, or
assessed at too low a rate, or have been made the subject of excessive relief
under the Act, or excessive loss or depreciation allow-ance has been
computed, or……

(a) the Income-tax
Officer has reason to believe that, by reason of the omission or failure on
the part of an assessee to make a return under section 139 for any assessment
year to the Income-tax Officer, or to disclose fully and truly all material
facts necessary for his assessment for that year, income chargeable to tax
has escaped assessment for that year, or(b) notwithstanding that
there has been no omission or failure as mentioned in clause (a) on the part
of the assessee, the Income-tax Officer has in consequence of information in
his possession reason to believe that income chargeable to tax has escaped
assessment for any assessment year.

he may in cases falling under
clause (a) at any time and in cases falling under clause (h) at any
time within four years of the end of that year, serve on the assessee, or, if
the assessee is 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 re-assess such income,
profits or gains or recompute the loss or depreciation allowance; 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:

he may, subject to
the provisions of sections 148 to 153, assess or reassess such income or recompute the Joss
or the depreciation allowance, as the case may be, for the assessment year concerned
(hereafter
in sections 148 to 153 referred to as the relevant assessment year).

148. (I).Before making the assessment, reassessment or recomputation
under section 147, the Income-tax Officer shall serve on the assessee
a notice containing all or any of the requirements which may be included in a
notice under sub-section (2) of section 139; 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 Income-tax Officer shall not
issue a notice under clause (a) of sub-section (1)

(2) The Income-tax Officer shall,
before issuing any notice under this section, record his
reasons for doing so.

(i) for any year prior to the
year ending on the 3lst day of March, 1941 ;

(ii) for any year, if eight years
have elapsed after the expiry of that year, unless the income, profits, or
gains chargeable to income-tax which have escaped assessment or have been under-assessed
or assessed at too low a rate or have been made the subject of
excessive relief under this Act, or the loss or depreciation allowance which
has been computed in excess, amount to, or are likely to amount to, one lakh
of rupees or more in the aggregate, either for that year, or for that year
and any other year or years after which or after each of which eight
years have elapsed, not being a year or years ending before the 31st day
of March, 1941 ;

149. (3) If the person on whom a notice under section 148 is to
be served is a person treated as the agent of a non-resident under section 163 and the
assessment, reassessment or recomputation to be made in pursuance of the
notice is to be made on him as the agent of such non-resident, the notice shall not
be issued after the expiry of a period of two years from the end of the
relevant assessment year.

(iii) for any year, unless he has
recorded his reasons for doing so, and, in any case falling under clause

(ii), unless the Central Board of Revenue, and, in any other case,
the Commissioner, is satisfied on such reasons recorded that it is a fit case
for the issue of such notice:………

43. Any person employed by or on behalf of a person
residing out of the taxable territories, or having any business connection
with, such person, or through whom such person is in the receipt of any
income, profits or gains upon whom the Income-tax Officer has caused a notice to be served of his
intention of treating him as the agent of the non-resident person shall, for
all the purposes of this Act, be deemed to be such agent :

Provided that where transactions
are carried on in the ordinary course of business through a broker in the taxable
territories in such circumstances that the broker does not in respect of such
transactions deal directly with or on behalf of a non-resident principal but
deals with or through a non-resident broker who is carrying on such
transactions in the ordinary course of his business and not as a principal, such
first-mentioned broker shall not be deemed to be an agent under this section in
respect of such transactions :

Provided further that no person shall be
deemed to be the agent of a non-resident person, unless be has had an
opportunity of being heard by the Income-tax Officer as to his
liability.

163. (1) For the purposes of this Act, ‘agent’, in relation to a
non-resident, includes any person in India-

(a) who is employed by or on
behalf of the non-resident ; or

(b) who has any business
connection with the non-resident; or

(d) who is the trustee of the non-resident
;

and includes also any other person
who, whether a resident or non-resident, has acquired by means of a
transfer, a capital asset in India:

Provided that a broker in India
who, in respect of any transactions, does not deal directly with or on behalf
of a non-resident principal but deals with or through a non-resident broker shall not
be deemed to be an agent under this section in respect of such transactions,
if the following conditions are fulfilled, namely :

(i) the transactions are
carried on in the ordinary course of business through the first mentioned
broker; and

(ii) the non-resident broker is
carrying on such transactions in the ordinary course of his
business and not as a principal.

(2) No person shall be
treated as the agent of a non-resident unless he had had an opportunity of
being heard by the Income-tax Officer as to his liability to be treated
as such.”

5. At this stage it will be proper to reproduce the relevant part of the Privy Council decision in Nawal Kishore’s case :

” The first question for decision is whether by the terms of the Act it is necessary to the validity of a notice calling for a return of income under Section 25(2) where it is served upon a person as agent of a non-resijlent under Section 43, that it should have been preceded, not only by the notice of intention prescribed by Section 42 and by the opportunity of being heard prescribed by the proviso thereto, but also by an order to the effect variously described by the High Court as ‘ declaring the petitioner to be the agent of a non-resident person and treating him as such agent’. It may be reasonable that A should not be required to render a return of B’s income until it has first been decided that he is agent of B : on the other hand, having regard to the circumstances which for this purpose constitute agency, it may well be thought advisable that the information afforded by a return and by books of account produced in support thereof should be available for the purpose of deciding as to agency. The avoidance of delay may also be a consideration, the matter must be determined entirely upon the language of the Act, and their Lordships cannot find that it imposes the technical requirements upon which the High Court have insisted. It seems to their Lordships to be open to the Income-tax Officer under the Act to postpone any final determination of the question of agency until the time comes to make an assessment under Section 23 of the Aet. The notice of 13th February, 1928, was served before the expiry of one year from the end of the financial year 1926-27. Subject, therefore, to the merits of the case and to the answer to be given to the second of the three questions referred, the notice of 13th February was a valid initiation of proceedings to assess the respondent-firm as an agent under Section 43 and in respect of the year of assessment 1926-27. Proceedings if begun in time are not by the Act required to be completed within any time limit.”

6. The short question that arises for determination is whether the change in the phraseology of the relevant provision in the 1961 Act has affected the validity of the decision of the Privy Council already referred to ? The argument on behalf of the assessee is that the change in the provision made it incumbent on the Income-tax Officer that the question of agency should be settled first and before the assessment proceedings are commenced against the agent as the representative of the assessee. Particular stress is laid on the fact that a right of appeal has been provided against an order holding a person to be an agent, whereas no such corresponding right was provided in the 1922 Act.

7. After giving the matter my careful consideration, I am clearly of the view that the authority of the decision of the Privy Council has not been shaken or otherwise affected by the change in the phraseology of the corresponding provisions in the 1961 Act. The ratio of the Privy Council decision which was rendered when the 1922 Act was in force is that it is not incumbent on the Income-tax Officer to decide the question of agency until the time comes to make an assessment under Section 23, corresponding to Section 143 of the 1961 Act. There is nothing in the 1961 Act which makes it incumbent on the Income-tax Officer to decide the question of agency before he proceeds to make an assessment. In this respect the position remains the same as it was under the 1922 Act. He can do both the things simultaneously. In other words, the Income-tax Officer can decide the question of agency and also proceed to make the assessment on that basis. (The view I have taken finds support from three learned commentators on the Law of Income-tax in India). They have not opined that the authority of the Privy Council decision has been shaken. These commentators are Kanga & Palkhivala (sixth edition, volume I, page 832), Sundaram (tenth edition, volume I, page 1127) and Sampath Iyengar (fifth edition, volume 3, page 1380). The last mentioned author observes as follows:

” Before the Income-tax Officer proceeds to pursue a person as an agent, it is essential he must issue a notice to him of his intention to treat him as an agent and the latter must be given a sufficient opportunity to be heard (Section 163(2)). But, it is not necessary that the Income-tax Officer should declare him an agent before calling for a return. It is open to the Income-tax Officer to postpone the final determination of agency until the time comes to make an assessment.”

8. The same view is shared by the other two authors. The requirements of the statute have been satisfied. Notice was given to the agent and he was afforded an opportunity to be heard. Therefore, it does not matter that he postponed his decision till the time comes to make the assessment. The Act does not provide that he must decide the question of agency before he proceeds to assess.

9. For the reasons recorded above, I would answer the first question referred to us in the negative, that is, against the assessee and in favour of the department. In view of my answer to the first question, the second question will not arise and, therefore, no answer to it is necessary. There will be no order as to costs.

Bal Raj Tuli, J.

10. I have carefully gone through the judgment of my learned brother, but, in spite of my profound respect for his learning and sound knowledge of income-tax law, I have not been able to persuade myself to agree to the view expressed by him in this case.

11. The facts of the case and the provisions of law applicable have been set out succinctly in the judgment of my learned brother and I need not repeat the same. As stated therein, the short question that arises for determination in this case is whether the change of phraseology in the relevant provisions of the 1961 Act has affected the validity of the decision of the Privy Council in Nawal Kishore’s case. In that case the provision of law under consideration was Section 43 of the 1922 Act which described the persons who could be deemed to be the agent of a non-resident in the taxable territories and the requirement was that the Income-tax Officer should issue to the person, whom he wanted to treat as the agent of the non-resident, a notice of his intention to treat him as such (and there was no requirement that before issuing the notice to him calling for the return of the income of the non-resident, an order should be passed declaring him or treating him as the agent of the non-resident). There is no such corresponding provision in Section 163 of the 1961 Act. Sub-section (1) of this section only describes the persons who can be treated as ” agent ” of a nonresident and Sub-section (2) provides that ” no person shall be treated as the agent of a non-resident unless he had had an opportunity of being heard by the Income-tax Officer as to his liability to be treated as, such”. It is, therefore, necessary under this sub-section not only to issue a notice of his intention to treat the person as the agent of a non-resident, but to pass an order treating him as an agent of the non-resident after hearing him. This result also follows from the language of Sub-section (3) of Section 149 of the 1961 Act wherein it is mentioned that “if the person on whom a notice under Section 148 is to be served is a person treated as the agent of a non-resident under Section 163………” (emphasis mine). In my opinion, the grammatical meaning of this provision in Sub-section (2) of Section 149 is that before issuing a notice under Section 148, the addressee of the notice must have been treated as the agent of a non-resident, that is, his status as an agent of the non-resident must have been determined before the issue of a notice under Section 148. The corresponding provision in the 1922 Act was contained in proviso (2) to Sub-section (1) of Section 34, reading as under :

” Provided further that the Income-tax Officer shall not issue a notice under this sub-section for any year, after the expiry of two years from that year, if the person on whom the assessment or reassessment is to be made in pursuance of the notice is a person deemed to be the agent of a nonresident person under Section 43 ” (emphasis mine).

12. There is difference between the meaning of the words ” deemed ” and “treated”. What is implied by the word “deemed”” is that whether a person is or is not the agent of a non-resident in actual fact, he will be treated as such if he answers to the description stated in Section 43 of the 1922 Act. The word ” treated ” used in Section 149(3) of the 1961 Act, on the other hand, implies that the person to whom notice under Section 148 is to be issued has already been adjudged to be the ” agent” of the nonresident liable to file the return of income of the non-resident and to pay the income-tax to be assessed on him. If it is held that no difference has been made by the change in the language, there was no point in the legislature changing the phraseology in the 1961 Act. The purpose of the change in the language is clear that an order treating a person as an agent of the non-resident has to be passed before issuing notice under Section 148 of the 1961 Act.

13. As I have said above, under Section 43 of the 1922 Act, only a notice showing the intention to treat the addressee as an ” agent” of the nonresident was necessary to be issued by the Income-tax Officer and the persons who could be deemed to be the ” agent ” of the non-resident were described in that section. No obligation was cast on the Income-tax Officer to decide before issuing the notice calling for the return, to make an adjudication as to the status of the addressee of the notice as an ” agent ” of the non-resident and as such liable to file the return of income and pay income-tax on his behalf. This difference in the language has not been noticed by the learned commentators who have been cited by my learned brother in support of his view.

14. I also find force in the submission of the learned counsel for the respondent that the provision of an appeal against an order passed by the Income-tax Officer under Section 163 of the 1961 Act and by Clause (g) of Section 246 of that Act also leads to the conclusion that an order treating a person as an agent of a non-resident has to be passed before issuing the notice under Section 149(3) so that he can file an appeal against that order to avoid the submission of the return of the non-resident’s income by him and consequent harassment of producing accounts, etc., and replying to the various queries of the Income-tax Officer. Previously, in the 1922 Act, no appeal was provided against an order treating a person as an agent of a non-resident. Under Section 30 of that Act, in the appeal against the assessment order, the liability to assessment could be challenged by the assessee. That cannot amount to the same thing as an appeal against the order treating a person as an agent of the non-resident and liable to furnish returns of the latter’s income, etc. The corresponding provision enabling the assessee to file an appeal denying his liability to be assessed under the 1961 Act is provided in Clause (c) of Section 246, which is analogous to the provision for an appeal in Section 30 of the 1922 Act. The provision of a specific appeal under Clause (g) of Section 246 against an order passed under Section 163 treating the assessee as an agent of a non-resident clearly leads to the conclusion that it was intended by the legislature that an order should be passed under Section 163 before holding an assessee liable for the income of a non-resident as his agent. In any case, such a determination is necessary before issuing a notice under Section 149(3) of the 1961 Act.

15. The learned commentators, Kanga and Palkhivala, have referred to Nawal Kishores’ case, while commenting on Sub-section (2) of Section 163 of the 1961 Act under the heading ” Opportunity of being heard “. The paragraph of the commentary reads as under :

” Section 43 of the 1922 Act expressly required a notice to be served, on the person proposed to be treated as an agent and further required that he should be given an opportunity of being heard as to his liability. This sub-section does not refer to service of a notice but only provides for an opportunity of being heard. However, it seems that a proper opportunity of being heard in a matter of this importance would, generally speaking, involve the service of a notice, though such notice need not be in any particular form. If a reasonable opportunity of being heard has been given, it is not further necessary to the validity of a notice calling for a return of income where it is served upon a person as agent of a nonresident that it should be preceded by an order declaring him to be the agent of the non-resident. It is open to the Income-tax Officer to postpone any final determination of the question of agency until the time comes to make an assessment. If in the notice given in due course under Section 139(2) calling for a return of income the relevant assessment year is specified, the assessee can have no grievance in point of procedure merely because the year for which he is proposed to be treated as an agent is not mentioned in the notice under this section.”

16. As stated above, this commentary is based on Nawal Kishore’s case and it is significant to note that the learned commentators do not refer to Section 163 or Section 149(3) which require interpretation in the present case nor do they give their own interpretation of those sections. They merely refer to Section 43 of the 1922 Act and Section 139(2) of the 1961 Act and reproduce what is stated in the Privy Council judgment. This commentary is, therefore, of no help in the decision of the point before us.

17. Sundaram, in his commentary, has stated, in the tenth edition of his book, volume 1, at page 1127, that:.

” It is not necessary that orders should be passed under Section 163 before a notice is issued on the agent under Section 139(2) and it is open to the Income-tax Officer to postpone the final determination of the question of agency until the time comes to make an assessment under Section 143.”

18. In support of this statement, reliance has been placed on Nawal Kishore’s case and Blue Star Engineering Co. (Bombay) (P.) Ltd. v. Commissioner of Income-tax, [1965] 73 I.T.R. 283 (Bom.), which is also a decision under Section 43 of the 1922 Act and does not deal with Sections 149(3) and 163 of the 1961 Act and is, therefore, of no avail. The learned commentator has not referred to Section 149(3) of the 1961 Act with the language of which we are concerned. The language of Section 139(2) is entirely different and, as it has not been set out in the judgment of my learned brother, I deem it proper to reproduce the same.

” 139. (2). In the case of any person who, in the Income-tax Officer’s opinion is assessable under this Act, whether on his own total income or on the total income of any other person during the previous year, the Income-tax Officer may, before the end of the relevant assessment year, serve a notice upon him requiring him to furnish, within thirty days from the date of service of the notice, a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed :

Provided that, on an application made in the prescribed manner, the Income-tax Officer may, in his discretion, extend the date for the furnishing of the return, and when the date for furnishing the return, whether fixed originally or on extension, falls beyond the 30th day of September or, as the case may be, the 31st day of December of the assessment year, the provisions of Sub-clause (iii) of the proviso to Sub-section (1) shall apply.”

19. There are no words in Section 139(2) like “treated as the agent of a non-resident under Section 163 “. On the other hand, the words are ” who in the Income-tax Officer’s opinion “, which clearly imply that there is no obligation on the Income-tax Officer to make the determination of the status of an assessee before issuing notice under Section 139(2) of the 1961 Act. This difference between the language of Sections 139(2) and 149(3) has not been kept in view by the learned commentators and, therefore, their commentary can be availed of only for interpreting Section 139(2) and not Section 149(3). It is said that the assessment and reassessment are at par. That may be so, but for initiating proceedings under Section 139 and Section 148, the procedure is different in so far as the agent of a non-resident is concerned and unless the specific procedure prescribed in a particular case is followed, the initiation of proceedings is bad in law and the “assessment made in consequence thereof has to be quashed. On that basis, it can be said that the Privy Council decision in Nawal Kishore’s case may still hold good qua Section 139 of the 1961 Act, on which I express no firm opinion, but it can certainly not be applied to a notice to be issued under Section 148 of that Act to the agent of a nonresident.

20. The commentary by Sampath Iyengar, which has been reproduced by my learned brother, is based only on Nawal Kishore’s case and the provisions of Section 149(3) of the 1961 Act have not been adverted to. Whatever I have said in the preceding paragraph also applies to this commentary. I am, therefore, of the opinion that what is stated in these commentaries does not concern the interpretation of Sections 149(3) and 163 of the 1961 Act with which we are concerned in this case and is, therefore, of no help.

21. It is a well-settled principle of interpretation of statutes that every section of the statute must receive such a construction as the language in its plain meaning imports, that is, strict grammatical meaning of the words is the only safe guide. Moreover, in interpreting taxing statutes, if the language admits of two interpretations, one favourable to the assessee has to be preferred to the one favouring the revenue. The change of language made in Sections 149(3) and 163 of the 1961 Act as comgared to the corresponding provisions in the 1922 Act is not without meaning and purpose and the only meaning and purpose that can be gathered from the language of these sections is that the dictum of their Lordships of the Privy Council in Nawal Kishore’s case is no more applicable to a notice to be issued under Section 148 of the 1961 Act to a person as an agent of a nonresident. That notice can only be issued after passing an order that the assessee is the agent of the non-resident and is to be treated as such. This decision has, of course, to be made after complying with the provisions of Sub-section (2) of Section 163 of the 1961 Act. Without deciding this matter, no notice under Section 148 read with Section 149(3) of the 1961 Act can be issued. I am, therefore, of the opinion that the first question referred to this court should be answered in the affirmative, that is, in favour of the assessee and against the department.

22. The respondent filed a return under protest without admitting that it was the agent of the non-resident and in the return filed the income of the non-resident was shown as nil. The submission of this return by the respondent did not cure the defect in the initiation of the proceedings under Section 148 of the 1961 Act against the respondent and for this reason the answer to question No. 2, referred to this court for opinion, is in the negative, that is, in favour of the assessee and against the revenue.

23. I agree with my learned brother that the parties should be left to their own costs.

ORDER

24. In view of the difference of opinion, this case is now sent to the learned Chief Justice for nominating a third judge to hear the parties and decide the same.

Harbans Singh, C.J.

25. This income-tax reference made by the Income-tax Appellate Tribunal, Delhi Bench ” C “, at the instance of the Commissioner of Income-tax, Patiala, has been placed before me in view of the difference of opinion between D. K. Mahajan J. and B. R. Tuli J. The two questions referred were as follows:

2. If the question No. 1 is answered in the affirmative, whether the fact that the assessee filed return as an agent of Didar Singh Chug without admitting that it was his agent, cured the assessment order of the illegality in the initiation thereof ? ”

26. The relevant assessment years is 1960-61 and the accounting year ended on 31st March, 1960. On 9th January, 1963, the Income-tax Officer, “B ” Ward, Amritsar, issued a notice to Messrs. Kanhayalal Gurmukh Singh (hereinafter referred to as “the assessee”) under Section 163 of the Income-tax Act, 1961 (hereinafter referred to as ” the Act “), asking the assessee to show cause why it should not be treated as an agent of the nonresident, D. S. Chug, for all purposes of income-tax. The ground given was that there were business connections between the aforesaid nonresident and the assessee. The assessee was asked to show cause on 22nd January, 1963, at the office of tne Income-tax Officer. This notice is annexure ” A ” in the paper book. The assessee did not appear in response to this notice. No order was passed under Section 163 of the Act by the Income-tax Officer treating the assessee as the agent of the non-resident. On 28th February, 1963, a notice under Section 148 of the Act, calling upon the assessee to submit a return in the capacity of being an agent of the non-resident, was sent to the assessee. In compliance with this notice, the assessee filed a nil return on , 9th May, 1963. This return was filed under protest and a note was added to the return that the assessee was not the agent of the said non-resident.

27. On 13th November, 1963, two separate orders appear to have been passed, one under Section 163 of the Act rejecting the objection of the assessee, that the assessee was not acting for the non-resident, and the other was an order of assessment assessing the assessee on the taxable income of Rs. 6,892 at maximum rate as provided in Section 113 of the Act. This order is annexure ” B “. An appeal filed by the assessee, challenging the fact that the assessee had any busipess connection with the non-resident and also regarding the quantum and the factum of any amount having been received, was dismissed by the Appellate Assistant Commissioner of Income-tax, vide order, annexure ” D “. On a further appeal having been taken to the Income-tax Appellate Tribunal, it was held that the notice under Section 148 of the Act was invalid inasmuch as the same was issued without passing an order under Section 163 of the Act, treating the assessee as an agent of the non-resident. As already indicated, at the instance of the department, the two questions, mentioned above, were referred to this court. This reference was heard by D. K. Mahajan and B. R. Tuli JJ. B. R. Tuli J. agreed with the view taken by the Income-tax Appellate Tribunal, whereas D. K, Mahajan J. felt that the view taken by the said Tribunal was not correct and that a notice could be issued under Section 148 of the Act even when there is no order passed under Section 163 of the Act and that the fact that the order of assessment and the order under Section 163 were passed on the same day, did not invalidate the assessment.

28. The short question for consideration, therefore, is whether an Income-tax Officer must first pass an order under Section 163 of the Act treating the assessee as an agent of the non-resident before a notice under Section 148 of the Act can be validly issued against him.

29. It was not denied that under the Income-tax Act of 1922 (hereinafter referred to as ” the old Act”), an Income-tax Officer was not called upon to decide the status of a person who was proposed to be treated as an agent of the non-resident under section 43 of the old Act and that this matter could be postponed by the Income-tax Officer till after a return had been filed. In other words, the question, whether a particular person was to be treated as an agent of a non-resident, could be settled on the same date as an order of assessment was passed by the Income-tax Officer. This proposition is well settled in view of the decision of the Privy Council in Commissioner of Income-tax v. Nawal Kishore Kharaiti Lal.

30. The contention ot the assessee, which was accepted by the Income-tax Appellate Tribunal and by B. R. Tuli J., however, was that the words used in Sections 163(2) and 149(3) of the Act are materially different from the words used in the corresponding Sections 43 (second proviso) and 34(1) of the old Act and that the change in the phraseology of these two sections of the Act (of 1961) makes it clear that an Income-tax Officer is bound to make an order taking a decision treating the person concerned as an agent of the non-resident before he can proceed to assess that person as an agent by issuing a notice under section 148 of the Act. This contention of the assessee, according to the Income-tax Appellate Tribunal and B. R. Tuli J., found further strength from the provision of a right of an appeal against an order under Section 163 of the Act treating a person as an agent, now provided under Clause (g) of Section 246 of the Act. The relevant portion of Section 43 of the old Act is in the following terms :

“Any person employed by……… a person residing out of the taxable territories, or having any business connection with such person……….upon whom the Income-tax Officer has caused a notice to be served of his intention of treating him as the agent of the non-resident person shall, for all the purposes of this Act, be deemed to be such agent: Provided……

Provided further that no person shall be deemed to be the agent of a non-resident person, unless he has had an opportunity of being heard by the Income-tax Officer as to his liability.”

31. Section 34(1) of the old Act provides for a notice being given by the Income-tax Officer with regard to income that escaped assessment and the second proviso to Sub-section (1) runs as under :

32. Provisions, corresponding to the above two sections, in the Act (of 1961) are contained in Sections 163(1) and 149(3) respectively. Relevant part of Section 163 of the Act runs as under :

“(1) For the purposes of this Act, ‘agent’ in relation to a nonresident, includes any person in India-

(a) who is employed by……the non-resident; or

(b) who has any business connection with the non-resident; or……

(2) No person shall be treated as the agent of a non-resident unless he had had an opportunity of being heard by the Income-tax Officer as to his liability to be treated as such.

Relevant portion of Section 149 of the Act is to the following effect:

“(3) If the person on whom a notice under Section 148 is to be served is a person treated as the agent of a non-resident under Section 163 and the assessment……to be made in pursuance of the notice is to be made on him as the agent of such non-resident, the notice shall not be issued after the expiry of a period of two years from the end of the relevant year.”

33. The argument on behalf of the department was that there is, in fact, no substantial difference in the provisions as they existed under the old Act and as they are under the Act (of 1961). The word “deemed ” appearing in the old Act and the word ” treated ” in the Act (of 1961) have both the same meaning. On the other hand, the contention of the assessee was that the words used in Section 149(3) of the Act are “treated” as the “agent” and he can be so treated under Section 163 of the Act only after he has been given an opportunity to be heard under Sub-section (3) of Section 163 and, consequently, before a notice under Section 148 of the Act can validly be issued against him, he must first be treated as an agent and that, therefore, the Income-tax Officer must, after giving an opportunity to the person concerned to be heard, take a decision, whether he would like to treat him as an agent or not. The mere fact that the Income-tax Officer had, by issuing him a notice, like the notice, annexure ” A “, expressed his intention to treat him as an agent, is not the same thing as actually treating him as such. Under Section 43 of the old Act after the Income-tax Officer had issued a notice indicating an intention to treat the assessee as an agent, the person concerned was deemed to be the agent, which would mean that it was not necessary to pass any specific order for this deeming provision to coins into force. No doubt the assessee was to be given an opportunity to be heard. If, after that opportunity, the Income-tax Officer was persuaded to change his mind not to treat him as an agent, it may be necessary to pass an order to that effect. However, if he was not persuaded to change his opinion, then under the operative part of Section 43, such a person would automatically be deemed to be an agent. Second proviso to Section 34(1) of the old Act, which prescribed a limit of two years, also used the words “deemed to be the agent” whereas in the corresponding provision of Section 149(3) of the Act, the words used are ” treated as the agent”. This contention of the assessee, as already stated, found favour with the Income-tax Appellate Tribunal and B. R. Tuli J. They also found reinforcement from the provisions of Section 246 of the Act dealing with appeals.

34. Under the old Act the provision regarding appeals was contained in Section 30, the relevant portion of which was as under:

“(1) Any assessee objecting to the amount of income assessed…………

or denying his liability to be assessed under this Act,……may appeal to
the Appellate Assistant Commissioner against the assessment……”

35. It is now well-settled and it was not disputed that, as held in In re Sehgal Brothers, under Section 30 of the old Act, an appeal did not lie against the order of an Income-tax Officer by which a person was deemed to be an agent under Section 43 of the old Act. An appeal lay only after an order of assessment had been passed against the person deemed to be the agent of a non-resident. In such an appeal he could, of course, dispute that he was an agent of the non-resident and thus deny his liability. In other words, the contention, that a person has been wrongly deemed to be an agent of the non-resident, could only be taken as one of the grounds of attack against the assessment order. The corresponding provision in the Act (of 1961) providing a right of appeal against the orderof an Income-tax Officer is in Section 246. Under this an assessee has a right of appeal when aggrieved in respect of various orders of the Income-tax Officer, These orders are detailed under several clauses and we are concerned with clauses (c) and (g), which are as follows :

” (c) an order against the assessee, where the assessee denies his liability to be assessed under this Act or any order of assessment under Sub-section (3) of Section 143 or Section 144, where the assessee objects to the amount of income assessed, or to the amount of tax determined, or to the amount of loss computed, or to the status under which he is assessed.”

36. This clause substantially corresponds to Section 30(1) of the old Act. Clause (g) of Section 246 of the Act is as follows :

“(g) an order made under Section 163 treating the assessee as the
agent of a non-resident.”

37. Sub-section (1) of Section 249 of the Act provides for the form of appeal and Sub-section (2) deals with the question of limitation. Sub-section (2) of Section 249 of the Act is to the following effect:

” (2) The appeal shall be presented within thirty days of the following date, that is to say,–…

(b) where the appeal relates to any assessment or penalty, the date of service of the notice of demand relating to the assessment or penalty, or

38. The argument of the assessee, in short, was that under the provisions of Section 246(g) of the Act, a person, who is treated as an agent, need not wait till the assessment against him, as such, is completed, but that he can avoid the botheration of submitting a return or answering the question(s) asked by the Income-tax Officer or producing the account books, etc., by challenging the order which treats him as an agent. The fact that limitation for this purpose starts from the date on which an intimation of the order is served on him (section 249(2)(c) goes to show beyond any chance of contraversy that such an order has to be made by the Income-tax Officer and if he can be permitted to postpone the making of such an order till after the return has been filed and he makes such an order simultaneously with the assessment order, then the very object of providing an appeal under Clause (g) of Section 246 of the Act would be nullified.

39. The learned counsel for the department urged, but, I think, without any force, that even if, as in the present case, the Income-tax Officer” makes an order under Section 163 of the Act and also the order of assessment on one and the same day, it is open to the assessee to file a separate appeal against the order under Section 163 and not file an appeal against the assessment, if he does not challenge the quantum. In such a case, there is not much to be gained by the assessee filing two separate appeals, one against the order under Section 163, under Clause (g) of Section 246, and the other against the assessment itself, under Clause (c) of Section 246 of the Act. The position would be the same as under the old Act, where the ground of denying the liability as an agent could be taken in an appeal against the order of assessment itself.

40. The obvious intention of the legislature in providing an appeal under Clause (g) of Section 246 against an order under Section 163 of the Act was that a person who is treated as an agent could challenge this matter so as to avoid further botheration to himself in facing the assessment. The provisions of Sections 246 and 249 of the Act leave no manner of doubt that, before an Income-tax Officer proceeds to assess the income, he must make up his mind to treat the person concerned as an agent or not to treat him as such and, therefore, he has to pass an order under Section 163 of the Act before he initiates the proceedings by issuing a notice under Section 148 of the Act. Even if there was some doubt, whether the phraseology of Sections 149(3) and 163(2) of the Act was so different from that of Sections 34(1) (second proviso) and 43 of the old Act as to show that is was necessary for the Income-tax Officer to pass an order before issuing a notice under Section 148 of the Act, that doubt is set at rest on examining the provisions of Sections 246 and 149 of the Act.

41. So far as the case of Nawal Kishore Kharaiti Lal is concerned, that was a decision given by the Privy Council regarding an assessment which related to the year 1926-27, when even the second proviso of Section 34(1) of the old Act did not exist and, in any case, their Lordships of the Privy Council were dealing with the provisions of the old Act, which, as pointed out above, were different from the provisions under the new Act. The ratio of that case would not be applicable to the facts of the present case.

42. Agreeing with the view taken by B. R. Tuli J., therefore, I would answer the first question in the affirmative.

43. So far as the second question is concerned, the mere fact, that the assessee made a return in protest, would not be sufficient to make the assessment legal. The answer to the second question must be in the negative.

44. The assessee will have his costs from the department for this reference.

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Commissioner Of Income-Tax vs Kanhaya Lal Gurmukh Singh on 16 December, 1970

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