1997 (1) TMI 477 - SC - Income Tax

On the basis of the information contained in the letter of Shri Bagai and the documents annexed to it the ITO could have had reason to believe that the fair market value of the shares was far more than the sale price and the market quotations from the Calcutta Stock Association shown by the assessee at the time of original assessment were manipulated ones and as a result income chargeable to tax had escaped assessment - ITO was justified in taking action u/s 147(b)

Summary

Issues Involved:
1. Validity of notices issued under section 147(b) of the Income-tax Act, 1961.
2. Validity of notices issued under section 17 of the Wealth-tax Act, 1957.

Issue-wise Detailed Analysis:

1. Validity of Notices Issued Under Section 147(b) of the Income-tax Act, 1961:

Background:
The appeals arose from the Rajasthan High Court's judgment dated November 26, 1979, which allowed writ petitions challenging the notices issued under section 147(b) of the Income-tax Act, 1961. The High Court quashed these notices, asserting that the Income-tax Officer lacked the requisite information to believe that income had escaped assessment.

Key Facts:
- The respondent claimed a long-term capital loss on the sale of shares of Maharaja Shree Umaid Mills Ltd., which was accepted by the Income-tax Officer and affirmed on appeal.
- The Income-tax Officer later received a letter from Shri S. M. Bagai, Deputy Director, Directorate of Inspector (Investigation), Special Cell, New Delhi, suggesting that the stock quotations were manipulated.
- Based on this letter, the Income-tax Officer issued a notice under section 147(b) of the Act, proposing to reassess the income.

Legal Analysis:
Section 147(b) of the Act requires:
1. The Income-tax Officer to have received information.
2. The Income-tax Officer to have reason to believe that income chargeable to tax had escaped assessment.

The Supreme Court noted that the letter from Shri Bagai contained detailed financial information about Maharaja Shree Umaid Mills Ltd., derived from the Bombay Stock Exchange Directory. This information indicated that the company's financial health had improved significantly, yet the stock quotations had fallen, suggesting manipulation.

Court's Findings:
- The Supreme Court disagreed with the High Court's view that the letter did not constitute information.
- The Court held that the Income-tax Officer could reasonably believe that the market quotations were manipulated and that income had escaped assessment based on the information in Shri Bagai's letter.
- The issuance of the notice the day after receiving the letter did not imply a lack of application of mind by the Income-tax Officer.

Conclusion:
The Supreme Court set aside the High Court's judgment, holding that the Income-tax Officer had sufficient information to issue the notice under section 147(b). The writ petitions filed by the respondents were dismissed.

2. Validity of Notices Issued Under Section 17 of the Wealth-tax Act, 1957:

Background:
The appeals also challenged the Rajasthan High Court's judgment quashing notices issued under section 17 of the Wealth-tax Act, 1957. The High Court's decision was based on its earlier judgment quashing the notices under section 147(b) of the Income-tax Act.

Key Facts:
- The High Court had quashed the notices under section 17 of the Wealth-tax Act for the same reasons it quashed the notices under section 147(b) of the Income-tax Act.

Legal Analysis:
The Supreme Court's decision to set aside the High Court's judgment regarding section 147(b) of the Income-tax Act directly impacted the validity of the notices under section 17 of the Wealth-tax Act.

Court's Findings:
- Since the High Court's judgment on the Wealth-tax Act notices was based on its earlier judgment, which the Supreme Court had set aside, the same reasoning applied to the Wealth-tax Act notices.

Conclusion:
The Supreme Court allowed the appeals, set aside the High Court's judgment, and dismissed the writ petitions challenging the notices under section 17 of the Wealth-tax Act.

Overall Conclusion:
The Supreme Court allowed the appeals, set aside the Rajasthan High Court's judgments, and upheld the validity of the notices issued under both section 147(b) of the Income-tax Act, 1961, and section 17 of the Wealth-tax Act, 1957. No order as to costs was made.