1966 (1) TMI 85 - HC - Income Tax

Summary

Issues Involved:
1. Validity and propriety of assessment under section 34.
2. Validity of the Income-tax Officer's actions in giving effect to the Appellate Assistant Commissioner's order.
3. Taxability of Rs. 1,50,000 as income for the year of account.

Detailed Analysis:

1. Validity and Propriety of Assessment under Section 34:
The assessee contended that the original assessment order determined that Rs. 1,50,000 would be income for the assessment year 1945-46, not 1944-45, and thus the second Income-tax Officer could not reasonably believe that the income had escaped assessment for 1944-45. The court found no substance in this submission, noting that the first Income-tax Officer had not made a conclusive determination about the receipt of Rs. 1,50,000. He had merely indicated the need for further materials to establish the fact of receipt. The second Income-tax Officer, upon receiving new information, reasonably believed that the income had escaped assessment.

The court emphasized that for section 34(1)(a) to apply, the Income-tax Officer must have reason to believe that income escaped assessment due to the assessee's omission or failure to disclose material facts. The belief should be based on reasonable grounds, not imagination or speculation. The court held that the first Income-tax Officer's lack of conclusive evidence did not negate the second Income-tax Officer's reasonable belief based on new information. Thus, the assessment under section 34 was valid.

2. Validity of the Income-tax Officer's Actions in Giving Effect to the Appellate Assistant Commissioner's Order:
The assessee argued that the Appellate Assistant Commissioner's direction to "re-do" the assessment implied starting afresh with a new notice under section 34. The court rejected this contention, stating that the original notice under section 34 was valid and the Appellate Assistant Commissioner's order did not annul or quash it. The direction to "re-do" the assessment referred to addressing procedural deficiencies, not initiating new proceedings. Thus, the Income-tax Officer's actions in giving effect to the order were valid.

3. Taxability of Rs. 1,50,000 as Income for the Year of Account:
The court examined whether the sum of Rs. 1,50,000 was taxable as income for the year of account. The assessee maintained the "Chetty system" of accounting, a combination of mercantile and cash basis. The court noted that the method of accounting regularly employed by the assessee must be determined under section 13, which mandates assessing income in accordance with the method of accounting regularly employed by the assessee.

The court considered the principle of appropriation of payments, where in the absence of appropriation by the debtor or creditor, the taxpayer is entitled to appropriate payments in a manner least disadvantageous to himself. The court referred to the Privy Council's decision in Commissioner of Income-tax v. Kameshwar Singh, which held that in questions with the revenue, the taxpayer can appropriate payments between capital and interest in the manner least disadvantageous to himself.

The court held that since the Rs. 1,50,000 was not brought into the assessee's accounts and there was no appropriation, it should be regarded as an open payment. Applying the presumption that the taxpayer is entitled to appropriate payments in a manner least disadvantageous to himself, the court concluded that the Rs. 1,50,000 should not be treated as taxable income for the year of account.

Conclusion:
The court answered the first two questions against the assessee, affirming the validity of the assessment under section 34 and the Income-tax Officer's actions. However, it answered the third question in favor of the assessee, concluding that the Rs. 1,50,000 was not taxable as income for the year of account. The assessee was entitled to costs of Rs. 250.