1971 (1) TMI 10 - SC - Income Tax

Reopening of assessment - assessee had disclosed the material facts to the department, it was under no obligation to inform the department about the possible inferences because it was for the department to raise such an inference - revenue s appeal dismissed

Summary

Issues:
1. Interpretation of Section 34(1)(a) of the Indian Income-tax Act, 1922 regarding the obligation of the assessee to disclose fully and truly all material facts necessary for assessment.
2. Reopening of assessment under Section 34(1)(a) based on the Income-tax Officer's belief of omitted facts.
3. Determining the scope of disclosure required from the assessee for assessment purposes.
4. Application of the Explanation to Section 34(1) in assessing the obligation of the assessee to disclose material facts.

Analysis:
The case involved the assessee, a limited company, disclosing profits from a joint venture with H. Manory Ltd. and claiming to have shared profits with Ratiram Tansukhrai under a partnership agreement. The Income-tax Officer initially accepted the return for the assessment year 1949-50 but later brought the entire profit amount to tax, alleging a sham transaction with Ratiram Tansukhrai to reduce profits. The Appellate Assistant Commissioner upheld the reassessment under Section 34(1)(a) based on the assessee's failure to disclose all material facts. However, the Income-tax Appellate Tribunal reversed this decision, stating that the assessee had no obligation to inform the Officer of the true nature of transactions.

The Tribunal's decision was based on the interpretation of Section 34(1)(a) which requires the assessee to disclose all material facts necessary for assessment. The Tribunal held that the assessee had provided all relevant accounts and documents, and there was no obligation to disclose possible inferences that could be raised against them. The Tribunal concluded that the Income-tax Officer should raise such inferences, and if not done, the escaped income cannot be taxed under Section 34(1)(a).

The Supreme Court, in its judgment, emphasized that the duty of the assessee is to disclose primary facts relevant to assessment, and there is no obligation to instruct the Officer on potential inferences. Mere production of evidence that could reveal material facts does not amount to disclosure under Section 34(1)(a). The Court highlighted that the Officer must draw correct inferences from the facts disclosed and cannot reassess based on later-regarded erroneous inferences. Consequently, the Court dismissed the appeal, affirming that the reassessment under Section 34(1)(a) was not justified as the assessee had fulfilled its obligation to disclose primary facts essential for assessment.