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TMI Blog1945 (2) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... he accounting year 1935-36 the gross profits returned by the assessee amounted to approximately five per cent. of the turnover of the year and in each of the subsequent four years, including the accounting year 1939-40, the gross profits returned varied between 5 per cent. and 5.6 per cent. of the year's gross turnover. In due course on the 18th July, 1940, the Income-tax Officer received the return of the assessee of the profits of the accounting year 1939-40 for the assessment year 1940-41. This disclosed that the gross income for the accounting year was ₹ 9,433, being a percentage of 5.6 of the turnover, and a net income of ₹ 2,050. These figures, apparently for the first time, aroused the suspicion of the Income-tax Officer and he, thereupon, examined the accounts of the accounting year 1939-40 in detail. As a result of this examination he found that on the 29th October, 1939, an item on the debit side of the accounts had been inflated by a sum of ₹ 5,000. The Income-tax Officer came to the conclusion that this was fraudulent and he caused a notice to be served on the assessee under Sec-tion 23(2) of the Indian Income-tax Act to attend at his office. On th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at, at the time the Income-tax Officer had actually served his notice under Section 34 in respect of the accounting year 1938-39, he had already, to his own satisfaction, actually found out a fraud to the extent of ₹ 5,000 in respect of the accounting year 1939-40, which subsequently led to his making further discoveries of the same kind in respect of the same year to the extent of a further ₹ 3,400 by way of inflation of purchases and ₹ 10,000 by way of reduction of cash balances. Moreover, at the time of the service of the notice on the 16th August, 1940, his suspicions had been thoroughly aroused as regards the balances brought forward in the books of the accounting year 1939-40 from the previous year. We have had to collect these facts painfully rather from a number of documents included in the volume accompanying the statement of the case than from the statement of the case itself. The statement of the case, which is a relatively brief document, sums the matter up as we think, inaccurately in paragraph 6 by saying : It would appear from the above resume that the information that came into the possession of the Income-tax Officer, viz., (1) that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for ourselves rather than discover from the statement of the case. They can be summarized thus :- (1) At the date of the relevant notice under Section 34, the Income-tax Officer had established to his own satisfaction an actual fraud in the books for the accounting year 1939-40; (2) the Income-tax Officer had established to his own satisfaction that he had been told by the assessee a falsehood as regards the destruction of the books for the previous years, and (3) the Income-tax Officer had reached the conclusion that, in the circumstances of his knowledge of the course of business over the whole period of five years, there was a probability that, the returned income having proved false in one year, it would on investigation prove false in other years of that period also. We can now approach the actual question of law put to us. We must concede that it is a question of law, because it involves not only the careful construction of the words of Section 34 of the Act, but the determination of certain principles of law involving such considerations as the degree of certainty in the mind of the Income-tax Officer required to constitute definite information and dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy means of reopening past accounts, but is also a section which is designed to protect the subject against anything in the nature of an inquisition at the instance of the department, founded on mere suspicion rather than on positive material. We think that, for the proper application of the amended Section 34 of the Indian Income-tax Act to any given set of circumstances, it is important to bear these considerations in mind. There are two things required by Section 34 to exist before it can be put into operation. First, there has to be in the possession of the Income-tax Officer and it must be in his possession at the date on which he puts Sections 34 into operation definite information. Secondly, the consequence of that definite information has to have been that, at the date at which he puts Section 34 into operation, he has discovered 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. We shall take the second, or discovers, part of the section first. On this there is considerable guidance to be obtained from Engli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te reason-to believe. In any close analysis of a discovery in a non-physical sense, absolute certainty is never attainable and there must always be some element, however infinitesimal, of doubt in any human deduction. We think, with respect, therefore, that the word discover must necessarily always involve a measure merely of belief, and, provided that that belief is the belief of an honest and reasonable person based upon reasonable grounds, we have difficulty in seeing what further fulfilment of the word discover there can be. In King v. Bloomsbury Income Tax Commissioners [1915] 3 KB 768; 7 Tax Cas. 59, the Lord Chief Justice referred to the case of King v. Commissioners for the General Purposes of the Income Tax for Kensington (ubi supra) with approval and said himself that:- The Surveyor may be mistaken in the 'discovery', but if there is information before him upon which he could, and did honestly believe the person to be liable to the duties, the only remedy is by the appeal prescribed by the Statutes. In Ingle v. Farrand [1925] 2 KB 728; 11 Tax Cas. 446, a case under Section 125 of the English Income Tax Act, 1918, the Master of the Rolls said that :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning of the Act. We now come to the words definite information. These present less difficulty, but it has to be remembered that both what is a discovery and what is definite information must necessarily vary with the circumstances of the case. We think that the words definite information are placed in Section 34 of the Indian Income-tax Act to protect the subject against an assault by the Income-tax Officer based upon mere suspicion. The definite information , which is something more than mere gossip or rumour, must lead to the discovery, or belief as we have described it above. But we are not prepared to engage ourselves to the view that, provided the information is definite and does lead to that belief, it need necessarily be information of fact, though in ninety-nine cases out of a hundred it would inevitably be information of fact. Still less need it be information of actual escape from assessment or under-assessment. It may well be information of circumstances not themselves amounting to under-assessment or escape from assessment, but leading to the belief of under-assessment or escape from assessment. In short, it may be circumstantial evidence. In the circum ..... X X X X Extracts X X X X X X X X Extracts X X X X
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