1958 (8) TMI 52 - HC - Income Tax

Summary

Issues:
1. Reopening of assessment under section 34 of the Income-tax Act
2. Justification for addition of profits to assessable income

Analysis:

The judgment involves an application under section 66(2) of the Income-tax Act, requesting the Income-tax Appellate Tribunal to state the case raising questions of law for decision by the court. The petitioners, a partnership firm engaged in construction contracting, had their assessment for the year 1943-44 reopened by the Income-tax Officer under section 34 of the Act. The Income-tax Officer added profits to the firm's income, alleging that materials received at concessional rates from the Government were sold in the black market. The Tribunal reduced the quantum of addition from the initial assessment but upheld the application of section 34(1)(a) to the case. The petitioners raised two questions of law: firstly, the legality of reopening the assessment under section 34, and secondly, the justification for the additional profit addition of Rs. 50,000.

Regarding the first issue, the court emphasized that section 34 can only be invoked when the Income-tax Officer has a "reason to believe" that income has escaped assessment, requiring reasonable grounds for action. Mere suspicions or rumors are insufficient. The petitioners argued that there was no material to support the Income-tax Officer's belief of escaped profits, as no additional evidence was cited post-assessment. The court found merit in this argument, directing the Tribunal to state the case for decision on this question of law.

On the second issue, the petitioners contended that the reassessment and additional profit addition amounted to a review of the original assessment based on the same material, rather than taxing genuinely escaped profits. They further challenged the lack of material justifying the Rs. 50,000 addition over the initial Rs. 1,00,000. The court agreed that these arguments raised a question of law, requiring the Tribunal to refer the matter for decision.

In conclusion, the court allowed the petition, directing the Income-tax Appellate Tribunal to state the case and refer both questions of law for decision. The judgment highlights the necessity for concrete grounds to invoke section 34 and the importance of justifying any additional profit additions during reassessment proceedings.