1970 (10) TMI 24 - HC - Income Tax

Reassessment proceedings under section 147(a) mere on basis of suspicion or change of opinion - validity of invoking section 147(a)

Issues Involved:
1. Validity of reassessment proceedings under section 147(a) of the Income-tax Act of 1961.
2. Jurisdiction of the Income-tax Officer to reopen assessments.
3. Duty of the assessee to disclose material facts.
4. Interpretation of "reason to believe" for reopening assessments.
5. Specific grounds for reopening assessments for the assessment years 1958-59 and 1959-60.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147(a):
The primary question was whether the reassessment proceedings under section 147(a) were valid. The Income-tax Officer reopened the assessments for the years 1958-59 and 1959-60, alleging that the assessee failed to disclose fully and truly all material facts, leading to income escaping assessment.

2. Jurisdiction of the Income-tax Officer to Reopen Assessments:
The judgment referenced the Supreme Court's decision in Calcutta Discount Co. Ltd. v. Income-tax Officer, which outlined that to confer jurisdiction under section 34 (now section 147), two conditions must be satisfied: (1) the Income-tax Officer must have reason to believe that income was under-assessed, and (2) this under-assessment must be due to the assessee's failure to disclose fully and truly all material facts. These conditions are precedent, and if not met, the Income-tax Officer lacks jurisdiction to reopen the assessment.

3. Duty of the Assessee to Disclose Material Facts:
The Supreme Court's interpretation in the Calcutta Discount Co. case emphasized that the assessee must disclose all primary facts necessary for assessment. The duty does not extend beyond disclosing primary facts; it is the Income-tax Officer's responsibility to draw inferences from these facts. A wrong inference by the officer does not justify reopening the assessment unless there was a failure by the assessee to disclose primary facts.

4. Interpretation of "Reason to Believe":
The "reason to believe" must be based on reasonable grounds and good faith, not merely a pretence. The belief must be founded on information, not suspicion. The court can review the existence and reasonableness of the belief but not the sufficiency of the reasons.

5. Specific Grounds for Reopening Assessments:
- Assessment Year 1959-60 (I.T.R. No. 4 of 1968):
- Rs. 2,80,513: The Income-tax Officer treated this as personal withdrawal for non-business purposes. However, it was found that the amount was covered by notional depreciation, and there was no material to suggest it was a withdrawal.
- Rs. 41,194: This amount was for constructing a tin printing factory, a business of the assessee, his wife, and minor children. The original assessment correctly inferred it as a business expense. The reopening officer's different inference was not a valid ground for reassessment.
- Loan to Sri S. N. Padmanabhan: The Appellate Assistant Commissioner noted that the original assessing officer was aware of the loan's nature. Thus, there was no failure to disclose material facts.

- Assessment Year 1958-59 (I.T.R. No. 3 of 1968):
- Rs. 10,000 advance to Sri S. N. Padmanabhan: The reopening was based on suspicion regarding the advance's nature. The Appellate Assistant Commissioner and Tribunal found that the relationship was disclosed, and the advance was part of regular business transactions. Mere suspicion was not a reasonable ground for reopening.

Conclusion:
The court concluded that the reassessment proceedings were invalid as they were based on wrong inferences drawn from fully disclosed primary facts. The belief for reopening was not founded on reasonable grounds but on mere suspicion. The court answered the common question in the negative, favoring the assessee, and awarded costs to the assessee with a consolidated counsel's fee of Rs. 250.

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