1971 (1) TMI 17 - SC - Income Tax

Reassessment Notice - assessee a money-lender received amounts from the debtor outside the compromise and did not enter the same in accounts whether it can be treated as appropriated towards capital - assessee must be taken to have appropriated these amounts towards the interest due to him and the amounts were taxable income - remarks by the officer in the order sheet did not amount to decision by him on the basis of facts found but are to be treated as casual observation.

Issues Involved:
1. Validity of assessment under section 34(1)(a) of the Income-tax Act, 1922.
2. Compliance with the Appellate Assistant Commissioner's order to reassess.
3. Taxability of Rs. 1,50,000 as income for the assessment year 1944-45.

Detailed Analysis:

1. Validity of Assessment under Section 34(1)(a):

The legal representatives of the assessee contended that the Income-tax Officer (ITO) had information from the Income-tax Officer, Erode, during the original assessment, and thus, it was not open to him to initiate proceedings under section 34 later. The court rejected this argument, stating that the Tribunal's findings established that the assessee's father had suppressed the receipt of Rs. 1,50,000 from the mortgagor. The court emphasized that the assessee had a duty to disclose fully and truly all material facts necessary for his assessment. The court referred to the precedent set in Calcutta Discount Co. Ltd. v. Income-tax Officer, where it was ruled that to confer jurisdiction on the ITO under section 34(1)(a), two conditions must be satisfied: (1) reason to believe there was under-assessment, and (2) reason to believe the under-assessment resulted from non-disclosure of material facts. Both conditions were met in this case. The vague information initially available to the ITO was insufficient to tax the amount, especially given the assessee's denial and lack of supporting court records. However, the subsequent belief formed by the ITO based on further enquiry justified the issuance of the notice under section 34(1)(a).

2. Compliance with the Appellate Assistant Commissioner's Order to Reassess:

The court found no merit in the contention that the ITO did not give effect to the Appellate Assistant Commissioner's order. The Appellate Assistant Commissioner had set aside the original assessment order solely because the assessee had not been given a proper opportunity to present his case. The Appellate Assistant Commissioner did not invalidate the notice issued under section 34(1)(a). Therefore, the ITO was not required to issue a fresh notice but merely to afford the assessee an opportunity to show that he had not received the Rs. 1,50,000. This opportunity was duly provided, and the reassessment was conducted accordingly.

3. Taxability of Rs. 1,50,000 as Income for the Assessment Year 1944-45:

The High Court had concluded that the Rs. 1,50,000 received by the assessee should be presumed to have been appropriated towards the principal amount due from the mortgagor, and hence, it was not taxable as income. The High Court's reasoning was based on the Chetty system of accounts, which prioritizes appropriations first towards litigation costs, then principal, and finally interest. The High Court also relied on the principle that a taxpayer is entitled to appropriate payments in a manner least disadvantageous to himself, as seen in Commissioner of Income-tax v. Kameshwar Singh.

The Supreme Court disagreed, noting that the presumption of appropriation depends on the circumstances of each case. In this case, the total amount due exceeded Rs. 6 lakhs, with the principal being less than Rs. 3 lakhs. The compromise decree was for Rs. 3,50,500, and the creditor secretly received Rs. 1,50,000 without entering it in the account books, indicating an intention to evade tax. The court concluded that the amount was appropriated towards interest, not principal, as evidenced by the lack of entry in the accounts. Therefore, the receipt of Rs. 1,50,000 was taxable as income for the year of account.

Conclusion:

- Civil Appeal No. 671 of 1967 (filed by the legal representatives of the assessee) is dismissed.
- Civil Appeal No. 365 of 1967 (filed by the Commissioner of Income-tax) is allowed, and the Rs. 1,50,000 is deemed taxable as income for the assessment year 1944-45. The assessee is ordered to pay the costs of the appeals.

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