# A. N. LAKSHMANA SHENOY v. Bose ]

- **Citation:** [1959] 1 S.C.R. 751
- **Court:** Supreme Court of India
- **Decided:** 1959
- **Bench:** S. R. DAS c. J, Venkatarama Aiyar, s. K. DAS, A. K. Sarkar, VIVIAN BosE
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/a-n-lakshmana-shenoy-v-bose-1543
- **Pages:** 35

## Headnote

·Income Tax--Re-assessment-OriginaJ, assessn:ent under the
provisions of Travancore, Cochin and Mysore Income-tax ActsConstitutional changes resulting in Travancore and Cochin, and
Mysore becoming Part B States-Extension of Indian Income-tax
Act to th~e States-Applicability of the Travancore, Cochin and
Mysore Income-tax· Acts for re-assessment for prior P.eriod-FinanciaJ, agreement between the President of India and the Rajpramukh- .
96
•
752
SUPREME COURT REPORTS
(1959]
r958
Effect on 1·e-assess1nent procecdittgs-Travancore Inconic~tax Act, II2I
(Travancore XXIII of IIZI), s. 47-Cochin Income-tax Act, III7
Lakshmana Shenoy (Cochin 'VI of III7). s. 44·-Mysore Income-tax Act, I923 (Mysore
v.
V of I92J), s. 34-Finance Act, I950 (XXV of r950), s. r3(r)-
The Income-tax Constitution of India, Arts. 278 and 295.
Offi.cer, Ernakulam
.
.
Sechop 13(1) of the Fmance Act, 1950, provided : " If
•
immediately before the 1st day of April, 1950, there is in force
in any Part B State ...... any la\v relating to income tax or supertax or tax on profits of business, that law shall cease to have
effect except for the purposes of the ·levy, assessment and
collection of income-tax and super-tax in respect of any period
not included in the previous year for the purposes of assessment
under the Indian Income-tax Act, 1922, for the year ending on
the 31st day of March, 1951, or for any subsequent year, or, as
the case may be, the levy, assessment and collection of the tax
on profits Of business for any chargeable accounting period ending on or before the 31st day of March, 1949 ... "
The appellant, a merchant carrying on his business in the
erstwhile States of Travancore and Cochin, was asse;sed to
income-tax for the two accounting years n22 M. E. (1946-1947)
and n23 M. E. (1947-1948) under the income-tax law in force
there, namely, the Travancore Income-tax Act of n21 M. E. and
the Cochin Income-tax Act of 1n7 M. E.
Between 1947 and
1950 there were constitutional changes resulting in the integration of the two States, formation of the United State of Travancore and Cochin, accession of the latter to the Dominion of
India, and finally, its acceptance of the Constitution of India
whereby it became a Part B State within the Constitution of
India. The question of financial integration was considered by
the Indian States Finances Enquiry Committee and on the basis
of the recommendations made by it a financial agreement was
entered into on February 25, 1950, between the President of
India and the Rajpramukh of the State of Travancore-Cochin.
By Art. 277 of the. Constitution taxes leviable under the Travancore Income-tax Act or the Cochin Income-tax Act continued to
be so levied until provision to the contrary was made by Parliament by law. Such provision was made by the Finance Act,
19501 which extended the Indian Incon1e-tax Act, I922 1 to the
State of Travancore-Cochin, but by s. 13(1) saved certain provisions of the Travancore and Cochin Income-tax Acts.
In respect of the as"il'ssment for the accounting year n24 M. E. the
Income-tax Officer of Ernakulam rejected the appellant's books
of account as unreliable and made a "best of judgment" assessment by his order dated January II, 1952. On February 12,
1952, the Income-tax Officer, Ernakulam, issued four notices to
the appellant, two under s. 44 of the Cochin Income-tai Act and
two under s. 47 of the Travancore Income-tax Act stating therein
. that in consequence of definite information which had come into
his possession, he had discovered that the income of the appellant
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758
for the assessment years n23 and n24 M. E had been underr958
assessed and that he proposed to re-assess the said income ; and
the appellant was asked to submit a return in respect of his Lakshmana Slienoy
total world income for the two years in question. The appellant
v.
challenged the jurisdiction of the Income-tax Officer to re-assess
The Income-tax
his income and contended (I) that the assessmen

## Text

_Characters 0–39,989 of 80,126. This is a partial read: ask again with offset=39989 for what follows._

•
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SUPREME 'COURT REPORTS
751
_courts of the new State .. So I agree that, so far as
r95a
this case is concerned, the ap. pellant must fail. .
M/ D 1 .. D d .
B t
1
d b
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. d
.
d d t
s.
a """
a n
u my earne
rot er s JU gment IS groun e
o cement co. Ltd.
a large extent on the views of the English courts which
v.
do not draw .the distinction that I am drawing here. The Commissioner
I therefore want to make it clear that this decision
°! Income-tax
must not be used as a precedent in a case in which
rights to immoveable property are concerned. Without in any way committing myself to one view or the
other, as at present advised, I feel it may be a pity
for us to disregard the trend of modern international
thought and continue to follow a line of decisions
based on the views of an older Imperialism, when we
are not bound by them and are free to mould our own
laws in the light of modern thought and conceptions
about.rights to and in immoveable property. But in
so far as the present case is concerned, I agree that
the appeal and the petition under Art. 32 should
both be dismissed.
Appeal and petition dismissed.
A. N. LAKSHMANA SHENOY
v.
Bose ].
April z8.
-.
THE INCOME TAX OFFICER, ERNAKULAM &
r
ANOTHER
(and connected appeals)
(S. R. DAS c. J., VENKATARAMA AIYAR, s. K. DAS,
A. K. SARKAR and VIVIAN BosE JJ.)
·Income Tax--Re-assessment-OriginaJ, assessn:ent under the
provisions of Travancore, Cochin and Mysore Income-tax ActsConstitutional changes resulting in Travancore and Cochin, and
Mysore becoming Part B States-Extension of Indian Income-tax
Act to th~e States-Applicability of the Travancore, Cochin and
Mysore Income-tax· Acts for re-assessment for prior P.eriod-FinanciaJ, agreement between the President of India and the Rajpramukh- .
96
•
752
SUPREME COURT REPORTS
(1959]
r958
Effect on 1·e-assess1nent procecdittgs-Travancore Inconic~tax Act, II2I
(Travancore XXIII of IIZI), s. 47-Cochin Income-tax Act, III7
Lakshmana Shenoy (Cochin 'VI of III7). s. 44·-Mysore Income-tax Act, I923 (Mysore
v.
V of I92J), s. 34-Finance Act, I950 (XXV of r950), s. r3(r)-
The Income-tax Constitution of India, Arts. 278 and 295.
Offi.cer, Ernakulam
.
.
Sechop 13(1) of the Fmance Act, 1950, provided : " If
•
immediately before the 1st day of April, 1950, there is in force
in any Part B State ...... any la\v relating to income tax or supertax or tax on profits of business, that law shall cease to have
effect except for the purposes of the ·levy, assessment and
collection of income-tax and super-tax in respect of any period
not included in the previous year for the purposes of assessment
under the Indian Income-tax Act, 1922, for the year ending on
the 31st day of March, 1951, or for any subsequent year, or, as
the case may be, the levy, assessment and collection of the tax
on profits Of business for any chargeable accounting period ending on or before the 31st day of March, 1949 ... "
The appellant, a merchant carrying on his business in the
erstwhile States of Travancore and Cochin, was asse;sed to
income-tax for the two accounting years n22 M. E. (1946-1947)
and n23 M. E. (1947-1948) under the income-tax law in force
there, namely, the Travancore Income-tax Act of n21 M. E. and
the Cochin Income-tax Act of 1n7 M. E.
Between 1947 and
1950 there were constitutional changes resulting in the integration of the two States, formation of the United State of Travancore and Cochin, accession of the latter to the Dominion of
India, and finally, its acceptance of the Constitution of India
whereby it became a Part B State within the Constitution of
India. The question of financial integration was considered by
the Indian States Finances Enquiry Committee and on the basis
of the recommendations made by it a financial agreement was
entered into on February 25, 1950, between the President of
India and the Rajpramukh of the State of Travancore-Cochin.
By Art. 277 of the. Constitution taxes leviable under the Travancore Income-tax Act or the Cochin Income-tax Act continued to
be so levied until provision to the contrary was made by Parliament by law. Such provision was made by the Finance Act,
19501 which extended the Indian Incon1e-tax Act, I922 1 to the
State of Travancore-Cochin, but by s. 13(1) saved certain provisions of the Travancore and Cochin Income-tax Acts.
In respect of the as"il'ssment for the accounting year n24 M. E. the
Income-tax Officer of Ernakulam rejected the appellant's books
of account as unreliable and made a "best of judgment" assessment by his order dated January II, 1952. On February 12,
1952, the Income-tax Officer, Ernakulam, issued four notices to
the appellant, two under s. 44 of the Cochin Income-tai Act and
two under s. 47 of the Travancore Income-tax Act stating therein
. that in consequence of definite information which had come into
his possession, he had discovered that the income of the appellant
•
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758
for the assessment years n23 and n24 M. E had been underr958
assessed and that he proposed to re-assess the said income ; and
the appellant was asked to submit a return in respect of his Lakshmana Slienoy
total world income for the two years in question. The appellant
v.
challenged the jurisdiction of the Income-tax Officer to re-assess
The Income-tax
his income and contended (I) that the assessment order dated O.ffi•er. Ernakulam
January II, 1952,. made by the Income-tax Officer for the
accounting year u24 M. E. being the only document on which
the Income-tax Officer relied for issuing a notice to the appellant,
the requisite conditions for the application of the statutory provisions were lacking, (2) that s. IJ(I) of the Finance Act, 1950,
did not have the effect of saving the provisions of the Travancore Income-tax Act or the Cochin Income-tax Act for the pur-
\
pose of re-assessment of income-tax, and (3) that the financial
agreement made between the President of India and the Rajpramukh dated February 25, 1950, which received constitutional sanctity in Art. 278 of the Constitution, rendered the
initiation of such re-assessment proceedings unconstitutional and
void: .
.
Held, (1) that though the meaning of the phrase "definite
information " in s. 44 (I) of the Cochin Income-tax Act and
s. 47(r) of the Travancore Income-tax Act, must depend on the
circumstances of each case, there must be a casual connection
between the information and the discovery. referred to in the
sections ; but discovery does not mean a conclusion of certainty
at the stage of notice ; it is enough if the Income-tax Officer
forms an honest belief.
Accordingly. the assessment order dated January II, 1952,
which disclosed a definite and systematic pattem of transactions
for avoidance of tax not only in respect of the year covered by
the order but spread over years anterior to it, amounted to information which, if honestly believed, would reasonably support
the opinion of the Income-tax Officer that there was a discovery of "escaped" income, etc., within the meaning of the
sections;
.
Firm fitanram Nirmalram v. Commissioner of Income-tax,
A. I. R. r952 Pat. 163, approved.
(2} that the expression "levy, assessment and collection of
income tax" in s. r3(1) of' the Firrance Act, 1950, was ·wide
enough to comprehend re-assessment proceedings under s. 47
of. t)i,e Travancore Income-tax Act and s. 44• of the Cochin
Income-tax Act;
''I
Commissioner of Income-lax, Bombay Presidency and Aden v:
f{h.emchand Ramdas, (1938) L R. 65 I. A. 236 •. explaine\l,.
·
Fir1JI L. Hazari Mal v. Income-tax Officer, ·AmJ)ala, A. I. R.
1957 Punjab 5, approved,
.
'. ·
·
·
·
(3) th~t on a tru~ construction of· the recommerrdations or
the Indian States Fina-noes Enquiry Committee, the financial
'
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SUPREME COURT REPORTS
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agreement between the President of India and the Ra jpramnkh
-
did not render the impugned proceedings unconstitutional or
Lakshmana Shenoy void.
h
v.
In the connected appeals, the respondents who were
T e Income~tax merchants doing business in the State of Mysore, were assessed
Officer, Erna ulam to income-tax under the Mysore Income-tax Act, 1923, for the
years prior to the integration of Mysore with India.
But subsequent to the integration of Mysore notices under s. 34 of the
Mysore Income-tax Act were issued against them for re-assessment of income-tax for the years prior to the integration. The respondents contended that the Income-tax Officer had no jurisdiction to issue such notices on the grounds (1) that under the
Finance Act, 1950, the Mysore Income-tax Act, 1923, stood
repealed on and from April l, 1950, and s. 13(1) of the former
Act kept alive the Mysore Act for the purpose of levy, assessment and collection of income-tax, etc., for the period mentioned
therein, but did not save s. 34 of the Mysore Income-tax Act for
the purpose of re-assessment of income-tax and, therefore, the
notices issued under s. 34 were without jurisdiction and authority, (2) that the financial agreement between the President of
India and the Rajpramukh of Mysore., dated February 28, 1950,
rendered the initiation of such re-assessment proceedings unconstitutional and void, and (3) that the jurisdiction under s. 34 of
the Mysore Income-tax Act was limited to ascertainment of extra
income not assessed and the section did not confer jurisdiction
to make a ne\v assessment under the Act:
Held, (1) that the Finance Act, 1950, empowered the
Income-tax Officer to take proceedings under s. 34 of the Mysore
Income-tax Act, for re-assessment, for the prior years, of the
under estimated or escaped income;
(2) that the financial agreement dated February 28, 1950,
did not render the proceedings for re-assessment, unconsti tutional or void ; and
·
(3) that though there was a distinction between an original
or normal assessment under s. 23 all;d a re-assessment under s. 34
of the Mysore Income-tax Act, the expression "levy, assessment
and collection of income-tax" in s. 13(1) of the Finance Act,
Ig50, had been used in .a_comprehensive sense so as to include
the whole procedure for imposing liability upon the assessee.
CIVIL APllELLATE
JURISDICTION:
Civil Appeals
Nos. 143 to 145 of 1954, 27 to 30 and 161 to 164 of
1956.
Appeals from the judgment and order dated September 14, 1953, of the former Travancore-Coch:i:n High
Court in Original Petitions Nos. 53, 56 and 57 of 1952.
• ·Appeals trom the judgment and order dated December 14, 195:!o, of.the Mysore High Court in C. P. Nos.
..
(
•
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SUPREME COURT REPORTS
755
52 ·and 53 and W. P. Nos. 105 and 106 of 1954.
z95B
Appeals from the judgment and order dated March Lakshm::;; Shenoy
22, 1955, of the Mysore High Court in Writ Petition
v.
No. 122 of 1954 and order dated April 7, 1955, in The Income-tax
w. P. Nos. 35, 36 and 37 of 1955.
Officer, Ernak1.Zam:
K. S. Krishnaswami Iyengar, M. U. Isaac and Sardar Bahadur, for the appellants in C. As. Nos. 143-45
of 1954.
H. N. Sanyal, Addl. Solicitor-General of India,
R:Ganapathy Iyer and R.H. Dhebar, for the appellants in C. As. Nos. 27-30 and 161-164of1956.
R. Ganapathy Iyer and R. H. Dhebar, for the respondent in C. As. Nos. 143-145 of 1954.
A. V. Viswanatha Sastri and G. Gopalakrishnan, for
the respondents in c. As. NOS. 27-30 of 1956.
A. V. Viswanatha Sastri, K. R. Choudhury and
G. Gopalakrishnan, for the respondents in C. As. Nos.
161-164 of 1956.
1958. April 28.
The Judgment of the Court was
delivered by
S. K. DAS J.-This judgment relates to
and
s. K. Das J.
governs eleven appeals which for convenience have
been classified into two groups. The first group may
be called the group of Travancore-Cochin appeals,
and within this group fall Civil Appeals Nos. 143 to
145 of 1954. The second group may be called the group
of Mysore appeals and within this group are eight
appeals, namely, Civil Appeals Nos. 27 to 30 of 1956
and 161 to 164 of 1956. By reason of the circumstance
that certain common questions of law and fact arise
in all these eleven appeals, they have been heard one
after the other ; but it will be conveni~t and will
avoid confusion if we state the facts relating to the
Travancore-Cochin group first and then deal with the
questions arising therefrom.
We shall then state the
additional facts of the Mysore group of appeals, and
answer •the questions arising therefrom, in so far only
as they have not been answered already in reiation to. •
the Travancore-Cochin group. It may be ~ere added
756
SUPREME COURT REPORTS
[1959)
r95B
that in the Travancore-Cochin appeals (Civil Appeals
L k h -
51
143 to 145 of 1954) the appellant is the assessee, A. N.
"s m•;_• ""
0YLakshmana Shenoy, of Messrs. New Guna Shenoy
The l11come-tax Company, Ernakulam, and the two respondents are
Office1. Emahulam the Income-tax Officers of Ernakulam in Cochin and
of Kottayam in Travancore. In the other group of
s. K. Da< f.
appeals, namely, the Mysore appeals, the appellants
are the Income-tax Officers of certain income-tax
circles in Bangalore and the respondents are assessees
who carry on business within the jurisdictional area of
the said Income-tax Officers. In the TravancoreCochin appeals, the High Court of Travancore-Cochin
came to a decision against the assessee, while in the
Mysore appeals the High Court of Mysore came to an
opposite conclusion on identical questions of law; that
is why in the first group of appeals the assessee.is the
appellant and in the second group the appellants are
the Income-tax Officers.
•
Travancore-Cochin appeals:
vVe proceed now to
deal with the Travancore-Cochin appeals. The assessee, A. N. Lakshmana Shenoy, is a hardware merchant
who carried on his trade and business for several years
in the then States of Travancore and Cochin, with his
headquarters at Ernakulam in Cochin.
He was
assessed to income-tax in both the States under the
income-tax law in force there, namely, the Cochin
Income-tax Act of 1117 M. E. (hereinafter referred to
as the Cochin Act) and the Travancore Income-tax
Act of 1121 M. E. (hereinafter referred to as the
Travancore Act).
He was so assessed by the Incometax Officer at Ernakulam for the Cochin State and the
Income-tax Officer at Kottayam for the Travancore
Sk.,,te. It is a matter of history that Cochin and
Travancore were formerly independent States, and till
the lapse of paramountcy, the Crown as represented
by and operating through the political authorities
provided the nexus between those States and the
Central Indian Government. The Indian Independence Act,
1947, released the States from their
obligation to the Crown; but in August; 1947,
·the Ruiers of the two States acceded to the
Dominion of lqdia. This was followed by a process of
\
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SUPREME. COURT REPORTS
757
two-fold integration-the consolidation of the States
r958
into sizeable administrative units and their democrati-
'sation. On May 27, 1949, the Rulers entered intoLaltshmana Shenoy
a covenant, which was concurred in by the GovernThe rn:~me-tax
ment of India. By that covenant the Rulers agreed Officer, Ernakulam
that as from the first day of July, 1949, the States of
Travancore and Cochin should be united in and form
s. K. Das J.
one State with a common executive, legislature and
judiciary by the name of the United State of Travancore and Cochin. The covenant further provided
that "there shall be a Rajpramukh for the United
State and the Ruler of Travancore shall be the first
Rajpramukh ; the executive authority of the United
State shall be exercised by the Rajpramukh and there
shall be a coun.cil of ministers to aid and advise him".
Article IX of the covenant said that "the Rajpramukh shall within a fortnight of the appointed day
execute on behalf of the United State an Instrument
of Accession in accordance with the provisions of s. 6
of the Government of India Act, 1935, and in place of
the earlier Instruments of Accession of the covenanting States; and he shall by such Instrument, accept
as matters with respect to which the Dominion Legislature may make laws for the United State all the
matters mentioned in List I and List III of the Seventh
Schedule to the said Act, except the entries in List
I relating to any tax or duty". There was a proviso
to the Article which said that nothing in the Article
shall be deemed to prevent the Rajpramukh from
accepting any or all of the entries in the said List I
relating to any tax or duty as matters with respect to
which the Dominion Legislature may make laws for
the United State. On July 14, 1949, a supplementary
Instrument was executed by the Rajpramukh by which
he accepted, on behalf of the United State, all matters
enumerated in List I and List III of the Seventh
Schedule to the Government of India Act, 1935, as
matters in respect of which the Dominion Legislature
might make laws for the United State, subject, however, to the proviso that nothing contained in the
said lists or in any other provision of the GoV'ernment · •
of India Act, 1935, shall be deemed tQ empower the
758
SUPREME COURT REPORTS
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Dominion Legislature to impose any tax or duty in
L k h -
ci
the territories of the United State. The result was
a s 1nana ,, ienoy h
.
.
v.
·
t at m spite of the integration and accession of the
The Income-tax United State to the Dominion of India, the Cochin Act
Officer. fanakulam continued to be in force in the territory formerly
--
known as Cochin and the Travancore Act in the terris. K. Das f.
tory known as Travancore. On November 24, 1949,
there was a proclamation by the Rajpramukh which
stated that in the best interests of the United State of
Travancore and Cochin it was desirable that the constitutional relationship established between the United
State and the Dominion of India shall not only be
continued, but the relation as between that State and
the contemplated Union of India shall be further
strengthened ; it was then stated that the Constitution
of India as drafted by the Constituent AssemQly of
India which included duly appointed representatives
of the United State provided a suitable basis for
strengthening the relation between the two States.
The proclamation then went on to say-
" And whereas by virtue of the power vested in
it under the Covenant establishing this State, the
Legislative Assembly of the State has resolved that
the Constitution framed by the Constituent Assembly
of India be adopted by this State.
I now hereby declare and directThat the Constitution of India shortly to be adopted
by the Constituent Assembly of India shall be the
Constitution for the United State of Travancore and
Cochin as for the other parts of India and shall be
enforced as such in accordance with the tenor of its
provisions.
That the provisions of the said Constitution shall
as from the date of its commencement, supersede and
abrogate all <Jther constitutional provisions inconsistent therewith which are at present in force in this
State."
The Constitution of India came into force on January
26, 1950, and on that date Travancore-Cochin jJecame
one of the Part B States within the Constitution of
• "India. Under that Constitution the subject of" taxes
on incomE: other than ·agricultural income" was
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SUPREME COURT REPORTS
759
·included in the Union Legislative List and Parliament
r958
alone had exclusive power to make laws in respect
1 -
1
h
f
Al
, £
.
.
f T
Laks 1mana S ienoy
t ereo .
l laws m orce m the terntory o
ravanv.
core-Cochin became subject to the . Constitution of Tile Income-tax
India when it came into force; but Art. 277 of the Officer. Ernakulam
Constitution enacted-
" Any taxes, duties, cesses or fees which immedias. K. Das J.
tely before the commencement of this Constitution,
were befog lawfully levied by the Government of any
State or by any municipality or other local authority
or body for the purposes of the State, municipality,
district or other local area may, notwithstanding that
·those t1txes, duties, cesses or fees are mentioned in the
Union List, continue to be levied and to be applied to
the same purposes until provision to the contrary is
made•by Parliament by law."
The result of the aforesaid provision of the Constitution was that the taxes leviable under the Cochin Act
or the Travancore Act continued to be so levied until
provision to the contrary was made by Parliament
by law. Such provision was made by the Finance
Act, 1950 (XXV of 1950).
Section 3 of that Act
extended the Indian Income-tax Act, 1922, to the
whole of India, except the State of Jammu and Kashmir, with effect from April 1, 1950. The interpretation
of s. 13 (1) of the Finance Act, 1950, is one of the
questions argued in these appeals, and the relevant
provision of that sub-section must be quoted in full-
" If immediately before the 1st day of April, 1950,
there is in force in any Part B State other than
Jam~u and Kashmir or in Manipur, Tripura or Vindhya Pradesh or in the merged territory of CoochBehar any law relating to income-tax or super-tax or
tax on profits of business, that law shall cease to have
effect except for the purposes of the levy," assessment
and collection of income-tax and super-tax in respect
of any period not inclu'ded· in the previous year for the
purposes of assessment under the Indian Income-tax
Act, 19'22, for the year ending on the 31st day of
March, 1951, or fqr any· subsequent year, or, as the .
case may be, the 'levy, assessment and collection of
•
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760
SUPREME COURT REPORTS
[1959]
1958
the tax on profits of business for any chargeable
L
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.
accounting period ending on or before the 31st day of
aks mana Shenoy March 1949.
. ..
The In:·ome-tax
Provided that any reference in any such law to
Officer, Ernahulam an officer, authority, tribunal or court shall be construed as a reference to the corresponding officer,
5 · [(. Das J.
authority, tribunal or court appointed or constituted
under the said Act, and if any question a rises as to
who such corresponding officer, authority, tribunal or
court is, the decision of the Central Government thereon shall be final : ".
So far we have traced the constitutional history of
the integration of Travancore-Cochin, its accession to
the Dominion of India and finally its acceptance of the
Constitution of India wherebv it became a Part B
State within the Constitution" of India. We rtow go
back to the story of the assessments made on. the
assessee. The income of the assessee for the two
accounting years, 1122 and 1123 M.E. (corresponding
to the years ending on August 16, 1947, and August
16, 1948, respectively) was assessed in the two assessment years, 1123 and 1124 M.E. in accordance with
the Cochin Act by the Income-tax Officer at Ernakulam by his orders dated July 28, 1949, and January
31, 1950, respectively. These assessments, the assessee
alleged, became final and he paid the taxes accordingly.
Similarly, the income of the assessee in Travancore
for the accounting years 1122 and 1123 M.E. was
assessed under the Travancore Act for the assessment
years 1123 and 1124 by the Income-tax Officer, Kottayam, by his orders dated April 11, 1949, and July 30,
1949, and these .assessments also, according to the
assessee, became final and he paid the taxes accordingly. The income of the assessee for the accoi,mti.ng
year 1124 M.'E. was assessed under the Indian Incometax Act, 1922, in the assessment year 1951-52 by the
Income-tax Officer, Ernakulam, by his order dated
January 21, 1952. The account books of the assessee
were rejected as unreliable and the Income-tax.Officer.,
.Ernakulam, made a " best of judgment " assessment.
•
This asse&sment order is Ext. VIII in the record. The
assessee appealed against it and, subsequently, on
r
SUPREME COURT REPORTS
761
December 14:, 1953, that is, subsequent to the decision
I958
on the three writ petitions filed in the High Court of L k h -
;,
'.J!rltvanco~e-Cochin, the Appellate Assis~nt Comrnisa ' ma:." 5 enoy
s10ner, Tr1va.ndrum, passed an order wh10h has been
The Income·tax
pro-cl.need before us with an application for taking it on Officer, Ernakulam
the l'eoord. ; We accepted the application and both the
assessment order, Ext. VIII dated January 21, 1952,
5· /(,Das].
and·tire appellate order dated December 14:, 1953, will
be•'duly•:oonsidered by us.
.
,
. On'l!~eoruavy 12, 1952, the Income.tax'Officer, Ernakulam, issuecl four notices to t.he assessee, two under
s; 44 of the Cochin Act and two under s. 4:7 of the
Travancore' Act stating therein that in consequence of
definite ir\formation which had come into his possessi:on;;he had discovered that the income of the assessee
assess~ble to income-tax for the assessment years 1123
a.rid U24: M, E. had been under-assessed and the Indome-ta:ir:Officer, therefore, proposed to re-aFJsess the
said inMrne; the assessee was asked to submit a return
in respect of his total world income for the two y0ars
in question.. On March 14, 1952, the Income-tax
Officer, Kotllayam, issued two similar notices to the
assessee under s. 47 of the Travancore Act stating
therein that he had discovered in consequence of definite information which had come int-0 his possession
that the income of the assessee for the two years 1123
and 1124: assessable to income-tax had either escaped
assessment or had been under-assessed or had been
assessed at too low a rate and therefore be proposed to
re,assess the said income. Presumably, the IncometS:x Officer, Kottayam, issued the two notices, because
it \vas doubtful i(the Income-tax Officer, Ernakulam,
had authority to issue notices to the assessee under
the Travancore Act. Nothing, however, turns upon
this, so far as the appeals before us are concerned.
On June 16, 1952, the assessee filed a writ petition
in the High Court of Travancore-Cochin in which he
challenged the jurisdiction of the Income-tax Officer,
Ernakulam, to re-assess his income for the two assessment years, 1123 and 1124 M. E. On the very day on
which the assessee filed his writ petition, the Income-· •
ta:icOfficer, Ernakulam, made an "escap~d income"
'
762
SUPREME COURT REPORTS
[1959)
,958
assessment under s. 44 of the Cochin Act for the assess-
-
ment year 1123. This order was communicated to
Lakshmana Shenoy the assessee on June 17, 1952, and the assessee filed a
The In;~me-tax second writ petition in the High Court of Tra vancoreOffim, Entakulam Cochin on June 19, 1952, in which he again challenged
the jurisdiction of the Income-tax Officer, Ernakulam,.
s. I<. Das f.
to make the assessment under s. 44 of the Cochin Act
and further said that the assessment was made in
spite of his application for adjournment and an order
of stay passed' by the .High Court on June 17, 1952.
On June 20, 1952 the assessee filed a third writ petition in the Travancore-Cochin High Court in respect
of the two notices issued to him by the Income-tax
Officer, Kottayam. By this writ petition th!J assessee
challenged the jurisdiction of the Income-tax Officer,
Kottayam, to issue the two notices in question under
s. 47 of the Travancore Act. These three writ petitions, numbered as original petitions 53, 56 and 57 of
1952, were dealt with together by the TravancoreCochin High Court and a Bench of three Judges of the
said High Court held by their judgment and order
dated September 14, 1953, that the two Income-tax
Officers concerned had jurisdiction to re-assess the
income of the assessee for the two assessment years
1123 and 1124 M. E. They accordingly dismissed the
writ petitions, but without costs. They, however, gave
a certificate that the cases were fit for appeal to the
Supreme Court under Art. 133 of the Constitution and
on that certificate the three appeals, which we have
called Travancore-Cochin appeals, have been brought
to this Court, from the judgment and order of the
High Court of Travancore-Oochin dated September 14,
1953.
In the High Court three main points were urged on
behalf of theo assessee : the first point taken was that
with the passing of the Finance Act, 1950, which made
Travancore-Cochin a "taxable territory" within the
meaning of the Indian Income-tax Act, 1922, incometax laws of Travancore and Cochin became v@id and
inoperative and Parliament could not, under s. 13,
, 'keep alive the Income-tax Acts of Travancore and
Cochin, or. any provisions thereof, inconsistent with
'
•
s.c.R.
SUPREME COURT REPORTS
763
the Constitution. Section 13 of the Finance Act, 1950,
r958
was, therefore, invalid in SO far as it tried to keepL--k , -
"' ..
•
h C ·h" A
h T
A t fi
th..
a snrnana ·'""'°Y
ahve t e . oc m
ct or t e
ravancore
c
or
e
v.
purpose of levy, assessment and collection of income-
·1heincome4ai
tax. for the .period referred to therein. The second O.[fice., Ernakulam
contention was that even if s. 13 of the ]'inance Act,
1950, was valid and kept alive the provisions of the
s. K. Das J.
Cochin Act and the Travancore Act, it did so only
"for the purpose of the levy, assessment and collection
of income-tax and super-tax." in respect of the period
mentioned in the section, ands. 13(1) did not have the
effect of saving the provisions of the Travancore Act
or Cochin Act for the purpose of " re-assessment of
income-tax and super-tax".
The third contention
urged was that neither of the two Inconie-tax Officers
oonc6rned had any definite information in consequence
&f which they came to any discovery that the income
of the assessee for the two years in question had been
under-assessed or escaped assessment or had been
assessed at too low a rate. It was contended on behalf
of the assessee that the statements in the notices with
regard to definite information etc. were only " a pretence to clutch at jurisdiction " and the very foundation of the action sought to be taken by the Income.
tax Officers under s. 44 of the Cochin Act or s. 47 of
the Travancore Act was non-existent. The learned
Judges of the High Court negatived the aforesaid contentions, and, as we have already stated, dismissed·
the writ petitions.
Before us the first point urged on behalf o fthe
assessee in the High Court has not been pressed. The
other two points, namely, (1) the true construction of
s. 13(1) of the Finance Act, 1950, and (2) the absence
of any foundation for the action sought to be taken
under s. 44 of the· Cochin Act ors. 47 of •the Travancore Act have been pressed with great vehemence.
A
third point which was specifically raised in the Mysore
appeals in the High Court there and which arises in
the Tra.vancore-Cochin appeals also, has been taken
before us, though it was not specifically taken in the.
High Court of Travancore-Cochin. We have allowed
•
learned counsel for the assessee to raise the point, as
764
SUPREME COURT REPORTS
(1959)
r95B
it involves a pure question of law. The point is· this.
L k h -
5 h
In the wake of accession and political integration· of
a s mana
enoy th S
d U .
f S
. h I d•
•
t.i
v.
. e > tates an
mons o
tates wit
n Ia arosec· tilff
The Income-•ax· problem of federal financial integration. · The· States.·
Officer. Ernakulam and Unions of States, so long as they continued as
separate units, had retained .their own pre-existing
s. K. Das ].
public finance structures.
They had one comriioii
feature, distinguishing· them from the Province$. -of
India, in that except in respect .of· certain matters
covered by the Standstill Agreements/the States .. wel'e
~
free to follow their own policies in matters 'of federal
'
finance and taxation, that is to say, in tllidield 0£
public finance, such as customs, income-tax;'- .central
excise, railways, posts and telegraphs etc.: W:hffil,the
question of integration of these States withr India
arose, naturally the question of extinguishing th~ spe'
cial rights and obligations of the States in the field Of
federal finance and of making good to them the net
gap in their revenues also arose.
By a Tesolution
r
dated October 22, 1948, the Govern'ment .of India
appointed a committee of experts, referred to as the
Indian States Finances Enq airy Committee, to consider
the problem of federal finance.
The Committee's
terms of reference were, inter alia, as follows- ·
" To examine and report upon:
(1) the present structure of Public Finance 111
Indian States and Unions of States; ·
(2) the desirability and feasibility of integrating
Finance in Indian States and Unions of States with
that of the rest of India, to the end that a uniform system of Federal Finance may be established
t.hroughout the Dominion of India;
(3) whether, and if so, the extent to which the
process of integrating :Federal Finance. in the Indian
States and tJ nions with that of the rest of India
should be gradual and the manner in which it should
be brought about; and the machinery required for his
purpose, especially as regards the legislative groundwork and the administrative organisation n~essary
·for the imposition, assessment and collection of federal
•
taxes;''.
The Committee· submitted a report in due course and
\
S.C.R.
SUPREME COURT REPORTS
765
made certain recommendations. On the basis of those
r958
recommendations certain agreements were entered into
/1
-
betweeh the President of India and the Rajpramukhs, La shmana Shenoy
including the Rajpramukh of Travancore-Cochin and Tlie In:~me-la:r
the Rajpramukh of Mysore.
We shall refer in some- Officer, Ernakulam
what greater detail to these agreements, particularly
the agreements entered into by the Rajpramukhs of s. K. Das J.
·Travancore-Cochin and Mysore.
The contention on
behalf of the assessee is that these agreements with
Part B States with regard to certain financial matters
received constitutional sanctity in Art. 278 of the
Constitution (now repealed by the
Constitution
(Seventh Amendment) Act, 1956). Article 278, so far
as it is relevant for our purpose, was in these terms-
" 278 (1).
Notwithstanding anything in the Constitueion, the Government of India may, subject to the
provisions of clause (2), enter into an agreement with
the Government of a State specified in Part B of the
First Schedule with respect to-
(a) the levy and collection of any tax or duty
leviable by the Government of India in such State and
for the distribution of the proceeds thereof otherwise
than in accordance with the provisions of this
Chapter;
(b) ........... .
(c) ........... .
and, when an agreement is so entered into, the provisions of this Chapter shall in relation to such State
have effect subject to the terms of such agreement."
The argument on behalf of the assessee is that the
·recommendations of the Indian States Finances Enquiry Committee which were accepted by the Rajpramukh of Travancore-Cochin 'in the agreement entered
into by the Rajpramukh with the President of India on
:February 25, 1950, were designed to secure "legal
continuity of pending proceedings" and " finality and
validity of completed proceedings " under the preexisting State legislation; therefore, s. 13(1) of the
.F'inanre Act, 1950, should be so construed as to be in
consonance with the aforesaid agreement, and, in the.
alternative, if s.13(1) is construed to be at variance
with the aforesaid financial agreement, ~t should be
•
766
SUPREME COURT REPORTS
.[1959)
•958
held to be void by reason of the provisions of Arts.
278 and 295 of the Constitution.
Lakshmana Shrnoy
W
d
t
'd
t'
'
d t ') f th
·
e procee now o. a cons1 era 10n 111
e a1 o
e
The r:;oine-tax arguments urged before us on behalf of the assessee. in
Officer, fanakulam the Travancore-Cochin appeals. In logical sequence
the point as to the absence of foundation for the action
s. K. Dus J.
takt:n by the two Income-tax Officers of Ernaknlam
and Kottayam in the matter of the issue of notices .for
reassessment comes first, and we propose now to deal
with it. It is necessary at this stage to set out the two
sections under which the Income-tax Officers proposed
to take action against the assessee. The two sections
ares. 44 of the Cochin Act ands. 47 of the Travancore
Act. Section 44 of the Cochin Act, so far as it is relevant for our purpose, is in these terms-
" 44( 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 inco.me-tax have escaped assessment in any
year, or have been under-assessed, or have been
assessed at too low a rate, or have been the 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
inuome or deliberately furnished inaecurate 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
27, and may proceed to assess or re-assess 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:".
Section 47 (1) of the Travancore Act is identical in
terms and need not therefore be quoted. It is worthy
of note that the terms of the aforesaid two sectivns are
similar to s. 34 of the Indian Income tax Act, 1922, as
• it stood after the amending Act of 1939 and before the
amendments of' 1948. The two requisite conditions
r
S.C.R.
SUPREME COURT REPORTS
767
for the application of the section are contained in the
I958
first part, and they are: firstly, there must be definite L k h -
'h ..
information which has come into possession of the a s ma;a " enoy
Income-tax Officer and, secondly, in consequence of rhe Inc~me-tax
that information, the Income-tax Officer discovers that Officer, Ernakulam
income, profits or gains chargeable to income-tax have
escaped assessment in any year etc. It is only when
s. K. Das J.
these two conditions are fulfilled that the Income-tax
Officer can take necessary action under s. 44. The
question before us is whether these two conditions
were fulfilled in the cases out of which the TravancoreCochin appeals have arisen.
As in the High Court so also before us, the only
document on which the Income-tax Officers relied for
this part of their case is Ext. VIII. This document,
according to the Income-tax Officers, furnished the
definite information in consequence of which they
made the necessary discovery. Learned counsel for
the assessee has taken us through Ext. VIII, Ext. A
(etatement of the case submitteQ. by the assessee to the
Appellate Assistant Commissioner) and the order of
the Appellate Commissioner, dated December 14, 1953,
and he has contended that (1) Ext. VIII does not
relate to the years in question and cannot, therefore,
constitute definite information for those years ; (2) it
gives certain highly speculative grounds for discrediting the account books of the assessee, which grounds
have not been accepted by the Appellate Assistant
Commissioner; and (3) in any view, it contained no information on which the Income-tax Officers could be
said to have made any discovery.
As to (1) above, the
High Court rightly lJOinted out that Ext. VIII con-
·tained information of a kind which disclosed a definite
and systematic pattern of transactions for avoidance
of tax not only in respect of the year covered by the
order but spread over years anterior to it. Secondly,
Ext. VIII disclosed, ac.cording to the Income-tax
Officers concerned, a systematic suppression of cash
sales, a.regular trade in purchase and sale of controlled
commodities at profiteering rates, passing bogus bills
for purchases, understating stocks, segregating stocks· •
98
. .
768
SUPl'tEME COURT REPORTS
[1959]
z958
for clandestine sales, and selling goods to the branches
k h -
5h
at artificial book losses. There can be no doubt that
La ' ma:~
enoy all this information, if honestly believed, would reasonThe Income-tax ably support the opinion of the Income-tax Officers
Officer, Ernakulam that there is a discovery of "escaped" income etc.,
within the meaning of s.