1976 (11) TMI 32 - HC - Income Tax

Assessment Proceedings Assessment Year Firm Consisting Reassessment Proceedings Total Income

Summary

Issues Involved:
1. Jurisdiction to take action under section 34(1)(b) of the Indian Income-tax Act, 1922.
2. Source of capital invested by the wife and minor son.
3. Applicability of section 16(3) regarding clubbing of income.

Issue-wise Detailed Analysis:

1. Jurisdiction to Take Action Under Section 34(1)(b):
The Tribunal found in favor of the assessee on the ground that the action under section 34(1)(b) was taken without jurisdiction. The Tribunal held that it was not possible to say that the 1st Income-tax Officer, D-II Ward, who reopened the proceedings, had information that income had escaped assessment. The Tribunal observed that this was a case where the applicability of section 16(3)(a)(iii) and (iv) had to be considered, a matter on which two opinions were possible. The Tribunal concluded that the reopening was based on a change of opinion and not on fresh information, thus lacking jurisdiction.

2. Source of Capital Invested by the Wife and Minor Son:
The Tribunal did not provide findings on whether the capital of Rs. 80,000 invested by the wife and minor son flowed from the assessee. The original assessment noted that the entire capital contributed by the assessee's wife and minor son came from the assessee himself, as gifts made by the assessee. However, the Tribunal did not delve into this issue as it allowed the appeal on the jurisdictional ground.

3. Applicability of Section 16(3):
The Tribunal did not decide on the applicability of section 16(3) of the Indian Income-tax Act, 1922, which pertains to the clubbing of income. The assessee argued that even if the capital was contributed by the assessee, the profits from the business could not be clubbed under section 16(3). The Tribunal noted the rival contentions but refrained from giving a decision on this point.

Detailed Judgment Analysis:

The Tribunal's decision was based on the view that the reopening of assessment was without jurisdiction, relying on precedents from the Nagpur High Court in D. R. Dhanwatay v. Commissioner of Income-tax and the Bombay High Court in Dr. M. R. Dalal v. Commissioner of Income-tax. These cases held that the belief of the Income-tax Officer that income had escaped assessment must be based on information of a fact, not law. The Tribunal observed that the reopening was due to a change of opinion unsupported by subsequent information.

Mr. Joshi, representing the Commissioner, argued that the Tribunal erred in relying on the Nagpur and Bombay decisions, citing the Supreme Court's decision in Kalyanji Mavji & Co. v. Commissioner of Income-tax, which confirmed the Madras approach and overruled the Nagpur and Bombay decisions. The Supreme Court in Kalyanji Mavji's case held that information could be derived from the record of the original assessment or from an investigation of the materials on record.

The High Court examined the principles laid down in various cases, including Dhanwatay's case, Dr. Dalal's case, and the Madras case of Rathinasabapathy Mudaliar. The court noted that the reopening of assessment must be based on information leading to the belief that income had escaped assessment, not merely a change of opinion.

The court also referred to the decision in Commissioner of Income-tax v. H. Holck Larsen, where it was held that a mere change of opinion would not justify reopening an assessment under section 34(1)(b). The court emphasized that the reopening must be based on fresh information or discovery of a mistake.

In Kalyanji Mavji's case, the Supreme Court outlined four categories where section 34(1)(b) would apply, including cases where income escaped assessment due to oversight or mistake. The court noted that the reopening in the present case did not fit these categories as there was no new information or discovery of a mistake.

The High Court concluded that the action of the 1st Income-tax Officer was based on a change of opinion unsupported by subsequent information. The court held that the reopening was not warranted and answered the question in favor of the assessee, affirming the Tribunal's decision.

The Commissioner was ordered to pay the costs of the reference to the assessee.