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TMI Blog1975 (12) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... d diverse society such as ours, dealing in complex commercial activities continues to produce multifarious facets of taxable income which has escaped assessment cloaked under difficult propositions and knotty legal problems. It is the onerous task of this court to dispel the doubts and resolve and reconcile the differing views taken by the High Courts in various situations which every time poses a new problem. The points involved in the instant case have baffled many a legal brain so much so that the High Court also appears to have been in two minds whether to place the information in the instant case as based on the materials already on the record of the original assessment of 1956-57 revealed by closer circumspection or to the information derived from subsequent or fresh facts. Before, however, examining the legal incidents of section 34 of the Indian Income-tax Act, 1922, it may be necessary for us to travel into the domain of the facts of the present case which are short and simple. The assessee-appellant, M/s. Kalyanji Mavji Company, is a registered partnership firm dealing in various commercial activities. The said firm filed its return for the year 1956-57 correspond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellate Assistant Commissioner, was of the opinion that the information of the Income-tax Officer resulting in the notice under section 34(1)(b) of the Act to the assessee was not based on any fresh facts but was derived from the materials on the record of the original assessment. The Tribunal further found that if the Income-tax Officer while completing the original assessment would have been careful enough to scrutinise the balance-sheet he would have at once detected the infirmity on the basis of which the subsequent Income-tax Officer issued the notice under section 34(1)(b) of the Act to the appellant. The Tribunal further was of the opinion that the subsequent Income-tax Officer merely changed his opinion on the basis of the very materials that were before him when the original assessment was made and that was not sufficient to attract the provisions of section 34(1)(b) of the Act. The Tribunal, accordingly, allowed the appeal and set aside the order of the Income-tax Officer issuing notice to the assessee under section 34(1)(b) for reopening the original assessment. Thereafter, the respondent, namely, the Commissioner of Income-tax, approached the Tribunal for making a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has been computed, or (b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed, he may in cases failing under clause (a) at any time and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, or, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice were a notice issued under that subsection: Provided that the tax shall be charged at the rates at which it would have been charged had the income, profits or gains not escaped assessment or full assessment, as the case may be." It would be seen that in the section as it stood in 1922 the word "information" was not there at all and the section merely empowered the Income-tax Officer to reopen the assessment of any year where income chargeable to tax had escaped assessment. No conditions or limitations on the power of the Income-tax Officer were at all laid down under the section. It appears that the appropriate legislature in its wisdom thought that this would be too wide a power to be given to the Income-tax Officer and may not be workable. In these circumstances, by the Indian Income-tax (Amendment) Act, 1939, this section was recast as under: "34. (1) If in consequence of definite information which has come into his possession the Income-tax Officer discovers that income, profits or gains chargeable to income-tax have escaped assessment in any year, or have been under-assessed, or have been assessed at too low a rate, or have been the subject of excessive relief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machinery is made as perfect and effective as possible so that the taxpayer is not allowed to get away with escaped income-tax. The fact that the adjective "definite" qualified the word "information" and the word "discovers" which were introduced in the Income-tax (Amendment) Act, 1939, were deleted by the Amendment Act of 1948 would lead to the irresistible inference that the word "information" is of the widest amplitude and comprehends a variety of factors. Nevertheless, the power under section 34(1)(b), however wide it may be, is not plenary, because the discretion of the Income-tax Officer is controlled by the words "reason to believe". It was so held by this court in Bhimraj Pannalal v. Commissioner of Income-tax, while affirming the decision of the Patna High Court in Bhimraj Pannalal v. Commissioner of Income-tax. This legal proposition, however, is not disputed. It, therefore, follows that information may come from external sources or even from materials already on the record or may be derived from the discovery of new and important matter or fresh facts. The word "information" will also include true and correct state of the law derived from relevant judicial decisions eith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilarly, in V. Jaganmohan Rao v. Commissioner of Income-tax, while following the decision of this court in Maharaj Kumar Kamal Singh's case it was observed as follows: "In these circumstances it was held by this court, firstly, that the word information in section 34(1)(b) included information as to the true and correct state of the law, and so would cover information as to relevant judicial decisions, secondly, that 'escape' in section 34(1) was not confined to cases where no return had been submitted by the assessee or where income had not been assessed owing to inadvertence or oversight or other lacuna attributable to the assessing authorities. But even in a case where a return had been submitted, if the Income-tax Officer had erroneously failed to tax a part of the assessable income, it was a case where that part of the income had escaped assessment. The decision of the Privy Council, therefore, was held to be information within the meaning of section 34(1)(b) and the proceedings for reassessment were validly initiated." The matter was again fully considered by this court in A Raman and Co.'s case, where Shah J., speaking for the court, extended the connotation of the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to oversight, inadvertence or a mistake committed by the Income-tax Officer. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority; (3) where the information is derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment; (4) where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law. If these conditions are satisfied then the Income-tax Officer would have complete jurisdiction to reopen the original assessment. It is obvious that where the Income-tax Officer gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, section 34(1)(b) would have no application. Learned counsel for the appellant heavily relied on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip business but held that this was on account of interest-free advance to the partners to pay their income-tax dues; and (3) the conduct of the appellant in not clearing the doubts of the Income-tax Officer when the appellant was given the notice to contest the assessment merely on the question of law also spoke volumes against the assessee and was also an additional factor which weighed with the Income-tax Officer. It would be seen that the Income-tax Officer in his order, which is annexure "A" to the statement of case filed by the Tribunal, observed as follows: "In the course of the assessment proceedings for 1958-59, however, it was discovered that the assessee's claim of payment of interest on money borrowed was not proper. Inasmuch as the entire money borrowed had been utilised not for the purpose of business but in giving interest-free advance to the partners of the firm.......In fact no argument as regards the allowance or disallowance of the interest amount in question was placed but the entire argument of the representative proceeded on the basis that the action u/s 34 itself was illegal....... There is no doubt that there has been under-assessment in this case and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. From this the Income-tax Officer concluded that the amount sought to be claimed as deduction was not incurred for the purpose of the partnership business. Thus, therefore, the subsequent information was: (i) the discovery by the Income-tax Officer that the deduction was wrongly claimed and his disallowance of that deduction; and (ii) the conduct of the appellant itself in not adducing any evidence or materials to prove its stand that the deduction was validly claimed. We might mention that it was submitted by Mr. Banerjee that in fact the amount sought to be deducted was paid towards the income-tax liability of the partners and this was done to protect the business itself and to improve the credit of the partners. Even this specific plea does not appear to have been taken before the Income-tax Officer. We are, however, not concerned with this particular plea because we are given to understand by the counsel for the appellant that the appeals against the assessment orders for the years 1958-59 and 1959-60 are pending before the income-tax authorities. In these circumstances we are clearly of the opinion that the facts of the present case clearly fall within the tests and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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