Law: Income Tax Act, 1922

Section: 34(1), (b), 34(3)

Income-tax---Escaped income-No action taken on returns Assessment barred by limitation-Whether can be assessed as escaped income-Assessment of association of persons set aside with direction to assess members thereof-Whether second proviso to S. 34(3) saves limitation-Indian Income-tax Act, 1922, Ss. 34(1), (b), & 34(3), 2nd proviso. ZB carried on a business with his sons, S and B. ZB gifted the business to his sons in 1942 and died in 1948. For the assessment years 1943-44 onwards, S and B filed returns showing that the business was carried on by them individually. The Income-tax Officer did not act on those returns, but assessed the business in the hands of an association of persons which included the sons and grandsons of ZB. In appeals for the assessment years 1945-46 to 1956-57 the Appellate Assistant Commissioner set aside on October 31, 1957, the assessment order and directed assessment of the income in the hands of the respective persons. On December 3, 1958, the Income-tax Officer initiated proceedings under section 34(1)(a) against S and B for the assessment years 1945-46 to 1953-54 which culminated in assessments on August 31, 1959. The Appellate Tribunal upheld he assessments holding that the assessment must be deemed to have been under section 34(1)(6) and that the bar of limitation for each assessment was raised by the second proviso to section 34(3) .4 S and B were not strangers to the association of persons. On reference to the High Court: Held, (i) that income had escaped assessment within the weaning of section 34 when the Income-tax Officer did not take cognizance of the returns filed by the assessee, S and B, and :flowed the assessment to lapse by the bar of limitation ; and (ii) the Appellate Assistant Commissioner, when dealing with he appeals of the association of persons, could not give a direction under section 34(3) to take action against the assessee, as the assessee could not be said to be connected with he association of persons in the sense in which that expression as been used by the Supreme Court in Income-tax Officer, a Ward, Sitapur v. Murlidhar Bhagwan Das (1964) 52 I T R 335 (S C). Therefore, the Income-tax Officer was…