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TMI Blog1972 (12) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... ll matters of public interest through the said newspaper, (c) to maintain the said newspaper and its press in an efficient condition, devoting the surplus income of the said newspaper and its press, after defraying all expenses, in improving and enlarging the said newspaper and its services and placing the same on a footing of permanency. Under that deed lie nominated himself, his brother, S. T. Adityan, and his son, B. R. Adityan, as the first trustees. The schedule to the trust deed referred to the newspaper known as "Dina Thanthi" as a going concern with all its assets and liabilities, including the printing machineries, printing types, furniture and accessories as the properties of the said "Thanthi Trust". After the said trust was created, it claimed exemption under section 4(3)(i) of the Indian Income-tax Act, 1922, from the assessment year 1955-56 onwards in respect of its income, and sought an order of exemption from the Income-tax Officer even before the regular assessments could be made. On November 6, 1961, the Income-tax Officer gave a tentative decision negativing the petitioner's claim for exemption based on the opinion tendered by the Central Board of Revenue t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 17-3-1965 1960-61 31-3-1965 1959-60 22-3-1966 1955-56 22-3-1966 1956-57 22-3-1966 1957-58 22-3-1966 1958-59 22-3-1966 1961-62 When the Income-tax Act of 1922 was replaced by the Income-tax Act of 1961, section 11 of the latter Act which gave exemption for income from property held for charitable or religious purposes was slightly in a different form than the earlier provisions in section 4(3)(i). Presumably taking note of the said change in the statutory provisions, the founder of the trust had executed a supplemental deed on June 28, 1961. Under that document the founder had directed that the surplus income of the "Thanti Trust", after defraying all expenses, shall be devoted by the trustees for the following purposes, namely: (1) Establishing and running a school or college for the teaching of journalism; (2) Establishing and/or running or helping to run schools, colleges or other educational institutions for teaching arts and science; (3) Establishing of scholarships for students of journalism, arts and science; (4) Establishing and/or running or helping to run hostels for students; (5) Establishing and/or running or helping to run orphanages; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 28, 1969, the account books relevant for the assessment years 1965-66 to 1967-68 as enjoined by the notice under section 142(1) of the Act. The Income-tax Officer immediately impounded the said account books. On the same date the Income-tax Officer issued summons under section 131 of the Act for the production of the books of accounts relevant for the assessment years 1962-63 to 1964-65 on or before March 3, 1969. The petitioner immediately filed Writ Petition No. 611 of 1969 questioning the validity of the said summons issued under section 131, contending that the Income-tax Officer had acted without jurisdiction and without authority of law in issuing the said summons and that the impugned summons was violative of the fundamental rights under article 19(1)(g) of the Constitution, and obtained stay. Pending the above writ petition, the same Income-tax Officer issued three notices dated May 23, 1969, under section 148 of the Act, to the petitioner for reopening the assessment for the three earlier assessment years 1965-66 to 1967-68 stating that he had "reason to believe" that there has been an escapement of income chargeable to tax in the above assessment years and directing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition. The said writ petition is, therefore, dismissed as having become unnecessary. As regards the other nine writ petitions, the petitioner contends that the various notices issued under section 148 of the Act, seeking to reopen the petitioner's assessments for the assessment years 1956-57 to 1961-62 and 1965-66 to 1967-68 are ex facie illegal, arbitrary and without jurisdiction for the following reasons: (1) the impugned notices seeking to invoke the provisions of section 147 on the ground that there has been an escapement of income chargeable to tax is totally devoid of jurisdiction, as there is absolutely no material to show that the petitioner-trust is not entitled to the exemption or that its income has escaped assessment during the respective years; (2) there has been no failure on the part of the petitioner to make a full and true disclosure of the material facts necessary for the completion of the assessments in question so as to enable the respondent to invoke section 147(a); (3) the impugned notices under section 148 had been issued with the sole object of making a roving enquiry into the working of the petitioner-trust and the alleged "reason to believe" is a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e face of these rival contentions we have to consider the validity of each of the notices issued by the respondent under section 148 of the Act. Sri C. K. Daphtary, learned counsel for the petitioner in all the writ petitions, contends that there is absolutely no ground for reopening the assessments for the various years, that there can absolutely be no "reason to believe" that the income chargeable to tax has escaped assessment in those years, that the fresh information and materials said to have been received by the respondent were all there even at the stage of the original assessments and that there was a full and thorough investigation of all the materials by the authorities at all levels before the exemption was granted. He also contends that the notices in all these cases do not indicate as to whether the reassessments are proposed on the basis of non-disclosure by the assessee as contemplated in section 147(a) or the fresh information contemplated in section 147(b), that section 147 is intended to prevent unnecessary harassment of the assessee by the Income-tax Officers, that the power of reassessment under that section can be invoked only when the conditions set out ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate reassessment proceedings against the company by issuing notices under section 34, and in his reports to the Commissioner for the purpose of obtaining sanction he had stated that at the time of the original assessments the representations made on behalf of the company that the sales of shares were casual transactions in the nature of mere change of investments were accepted, but that the company's accounts showed that it had been really and systematically carrying on a trade in the sale of investments, that the purchase and sale of shares were not casual transactions and that there has been a non-disclosure of the true intention behind the sale of shares. The Supreme Court, after dealing with the scope of section 34 of the Act exhaustively, if we may say so with respect, held that the question whether the sale of shares were by way of change of investments or by way of trading in shares had to be decided by the Income-tax Officer on a consideration of different circumstances, including the frequency of the sales, the nature of the shares sold, the price received as compared with the cost price, and several other relevant facts, that though it was the duty of the company to discl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all before him for believing that there had been such non-disclosure." The above decision is clearly an authority for two propositions, (1) that the court must be satisfied as to the existence of the two conditions, namely, (i) reason to believe that there has been under-assessment, (ii) such under-assessment has resulted from the non-disclosure of primary and material facts; and (2) that if all the primary and material facts had been placed by the assessee before the Income-tax Officer at the stage of the original assessment, the assessee cannot be said to be guilty of non-disclosure as the Income-tax Officer failed to draw a proper factual or legal inference from those basic and primary facts. In S. Narayanappa v. Commissioner of Income-tax the Supreme Court again reiterated the same principle thus: "But the legal position is that if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure as regards any fact, which could have a material bearing on the question of under-assessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under section 34. Whether these grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me to the High Court on a reference. The High Court held that the notice dated February 2, 1955, was not valid, since it was found that when the first reassessment was made the primary facts necessary for reassessment of the family were in the possession of the Income-tax Officer, that at the time of the first reopening of the assessment of the Hindu undivided family and of the individual members the question of assessment of the entire amount represented by the high denomination notes was under direct consideration, that it was open to the Income-tax Officer to assess the whole amount of Rs. 19,000 and Rs. 1,10,000 in the hands of the Hindu undivided family at that stage, and that the escapement, if any, therefore, took place by reason of the failure of the Income-tax Officer to assess the family with respect to the sum of Rs. 1,10,000 when he was in full possession of all the material facts. On appeal, the Supreme Court affirmed the decision of the High Court holding that because the primary facts were within the knowledge of the Income-tax Officer when he completed the first reassessment, the escapement of income took place by reason of the failure of the Income-tax Officer to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be communicated or disclosed to the assessee before reassessment proceedings under section 147 actually commence, but they have to be disclosed to the court when his jurisdiction to issue the notice is challenged on the ground that there is no reason to believe that certain income has escaped assessment by omission or failure of the assessee to disclose fully and truly all material facts necessary for his assessment, and the Income-tax Officer has to justify his assumption of jurisdiction only on those recorded reasons. The learned counsel for the petitioner submits that the Income-tax Officer, at the stage of the original assessment proceedings, had thoroughly examined all the facts which are now referred to in the counter-affidavit and was satisfied with the explanations given by the petitioner, and, therefore, the Income-tax Officer had no reason to believe that by reason of the omission or failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment for the various years the income, profits and gains, chargeable to income-tax for those years, have escaped assessment. According to the learned counsel, once the petitioner dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had sufficient material before him to entertain a belief that the income of the petitioner had escaped proper assessment. The nature of the enquiry held at the stage of the assessments is said to be not quite relevant for the purpose of finding out whether the impugned notices have been properly issued. In support of his contention that even in cases where there has been full and elaborate enquiries at the stage of original assessment, section 147 (a) could still be invoked, he refers to the decisions in Income-tax Officer v. Bachu Lal Kapoor, Kantamani Venkata Narayana Sons v. First Additional Income-tax Officer, Commissioner of Income-tax v. T.S.P.L.P. Chidambaram Chettiar and K. P. Arthanariswamy Chettiar v. First Income-tax Officer. In Income-tax Officer v. Bachu Lal Kapoor the Supreme Court laid down the proposition that the acceptance of a return or the completion of the assessment does not take away the jurisdiction of the Income-tax Officer to issue a notice to reassess on the ground that the information supplied by the return was not correct. In Kantamani Venkata Narayana Sons v. First Additional Income-tax officer the Supreme Court held that the assessee does not dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all materials necessary for the assessment. Though the impugned notices do not indicate whether the reopening is proposed under clause (a) or clause (b), the learned counsel for the revenue states the Income-tax Officer proposes to reopen the assessments only under clause (a) and not under clause (b), and this, the learned counsel says, is clear from the notices themselves. He points out that reference to the sanction obtained from the Commissioner of Income-tax or the Central Board of Revenue in the notices indicates that action is being taken only under clause (a) of section 147, as no such sanction is necessary or contemplated in cases coming under clause (b). We, therefore, proceed to consider whether the impugned notices could be sustained as having been validly issued for initiating proceedings under section 147 (a). Clause (a) of section 147 may be usefully set out at this stage: "147. Income escaping assessment.— If- (a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer, or to disclose fully and truly all material f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns are contained in the reports submitted by him to the Commissioner of Income-tax and also the Central Board for getting the requisite sanction under section 151 for initiating action under section 147(a). From those reasons set out for the various years it is seen that some new materials which were not available before the Income-tax Officer at the time of the original assessment have come to his possession from various sources. The learned counsel for the petitioner, however, states that there is no allegation of non-disclosure of primary facts in the counter-affidavits, that if the averments made therein are taken to indicate the substance of the materials available, they would not constitute any new material, for all those materials had been considered in elaborate detail by the Income-tax Officer at the stage of the original assessment, that a mere change of opinion on the part of the Income-tax Officer on the same materials will not enable him to initiate proceedings under section 147(a), and that the counter-affidavits cannot be supplemented at the time of arguments by the production of some records for the perusal of the court alone. We are not, however, inclined to hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e court on a challenge being made by the assessee on the question of jurisdiction of the Income-tax Officer to issue a notice under section 148, the attempt to satisfy only the court about the existence of the material is not sufficient, that it is not a private matter between the Income-tax Officer and the court and that all materials which are disclosed to the court should also be disclosed to the assessee so that he will assist the court in deciding the question of jurisdiction. What the learned counsel in effect says is that the court will not be justified in deciding the question of jurisdiction on the files and records being shown to the court without the petitioner having the benefit of the information available therefrom, and that the court will have to decide the question of jurisdiction only after the disclosure of that information to the petitioner. The learned counsel, however, concedes that in exceptional cases where confidential and privileged documents are placed before the court, the adversary cannot have a right to peruse the same. But in cases where no privilege is claimed or where the documents produced are not confidential, the assessee, it is said, cannot be ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e parties. A construction so unreasonable and unpractical ought not to be preferred when another construction is open." In Haji Ali Mohammad v. Commissioner of Income-tax, the Nagpur High Court declined to accept the contention that section 34 could not be used until there had been a preliminary enquiry concluded which had resulted in the Income-tax Officer concluding that a particular item of income had been omitted on the ground that such a construction of section 34 might result in very serious evasions. In Rungta Engineering Construction Co. Ltd. v. Income-tax Officer the Calcutta High Court had also pointed out that it is not desirable that the assessee should be informed of the materials which formed the basis of the notice under section 34 at the time of issue of the notice and the reasons set out by the court are these: "If the assessee is dishonest, the disclosure of the materials at this stage will be likely to lead to the manipulation of the books of accounts and other records. An honest trader who has not concealed his income has nothing to fear by submitting a fresh return and producing his account books pursuant to the notice issued by the Income-tax Officer. If t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the law as seen above, we are not able to see how the petitioner becomes entitled to the disclosure of the materials merely because he has challenged the jurisdiction of the Income-tax Officer. It is for the court to decide whether such a challenge is well founded or not. If, on going through the materials produced by the revenue before us, we are satisfied that there is reason to believe that income has escaped assessment by reason of the petitioner's non-disclosure of primary facts, we have to allow the proceedings to go on. We, therefore, proceed to consider as to what are the fresh materials for entertaining it reasonable belief that the income has escaped assessment by reason of the petitioner's omission or failure to disclose fully or truly all materials for its reassessment for the years in question. In these cases, among the various reasons given by the respondent, three are common to all the years. They relate to the question of genuineness of the trust. Of these three reasons one is based on a biography of Sri S. B. Adityan, the founder of the trust, written by one Sri Kurumbur Kuppuswami printed in the petitioner's press and published on April 1, 1969. In that book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question whether the newspaper is an yellow journal was considered at the stage of the original assessments in the light of the said decision of this court. It is significant to note that the question of exemption came to be considered only in pursuance of and in accordance with the directions contained in the said decision. If the Income-tax Officer has not chosen to draw the proper inference that the paper is an yellow journal and not an organ of educated public opinion, it cannot be said that the escapement of income was due to the non-disclosure by the petitioner of the primary facts. The third reason is based on a judgment of this court dated April 4, 1968, in Criminal Appeal No, 810 of 1965 arising out of certain prosecutions launched against three persons of whom one was a trustee of the petitioner-trust for misappropriation, breach of trust and making false entries in the accounts of the trust in pursuance of a criminal conspiracy between them. The accused in that case had raised a defence that amounts said to have been misappropriated had really been given to P.W. 7, the founder of the trust, for meeting his election expenses, that P.W. 7 was in the habit of taking f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re made to several persons and no voucher from those persons has been produced. Apart from the belated entry in the ledger under the heading 'advances' the particular persons have not been debited with the amounts pertaining to them according to exhibit D-5." Lastly, the learned judge winds up by saying: "To sum up, though there is support for the defence suggestion that P.W. 7 drew large sums of money for election purposes from the 'Daily Thanthi' on vouchers which did not reflect the truth, so far as three amounts are concerned, the circumstances oblige the court to adopt the evidence of P.W. 7 that these amounts were not paid to him and he did not instruct the accused 1 to 3 to make false entries." This judgment has been received from an informant by the Director of Inspection on October 25, 1968, and that was communicated to the department at Madras on October 30, 1968, long after the original assessments granting the exemption had been made to the petitioner-trust up to the assessment year 1967-68. According to the respondent the said observations made in the above judgment, prima facie, showed that the representations made by the petitioner at the stage of the original ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enuineness of the trust which came into existence in the year 1954. It is well established, that the subsequent acts and conduct of the founder of the trust cannot affect the trust if there has been already a complete dedication. (Vide Krishmaswamy Pillai v. Kothandarama Naicken, Sunder Singh Mallah Singh Sanatan Dharam High School Trust, Indaura v. Managing Committee, Sunder Singh Mallah Singh Rajput High School, Indaura and Gokuldoss Jumnadoss and Co. v. Lakshminarasimhalu Chetti). If a valid and complete dedication had taken place, there would be no power left in the founder to revoke and no assertion on his part or the subsequent conduct of himself or his descendants contrary to such dedication would have the effect of nullifying it. If the trust had been really and validly created, any deviation by the founder of the trust or the trustees from the declared purposes would amount only to a breach of trust and would not detract from the declaration of trust. Therefore, the subsequent conduct of the founder in dealing with the funds of the trust long after the creation of the trust may not put an end to the trust itself. There can, therefore, be no reason for doubting the genuinen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. In respect of some years, it is stated that there are large suppressions of sales of papers. It is also stated that from certain communications received from certain sources, " t appears that those persons (alleged creditors) are mere name-lenders and the transactions are bogus". The question is whether these materials relating to each of the years can form a proper basis for entertaining a reasonable belief that the income has escaped assessment in that year by reason of the non-disclosure by the petitioner. It prima facie appears to us that some of the reasons set out above almost amount to a change of opinion in respect of certain items and there can be no question of the non-disclosure by the assessee leading to the escapement of income in relation to those items. However, it is not necessary for us to see whether all the reasons set out for each year by the Income-tax Officer in his reports are tenable. If at least one of the grounds in respect of each of the years is such as to lead to a prima facie and reasonable belief that income has escaped assessment in that year by reason of the non-disclosure of the primary facts by the assessee, the jurisdiction of the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditional investment of Rs. 1,62,014 in shares at great risk to the trust; (2) deduction of interest of Rs. 60,722 on borrowing wrongly allowed; and (3) an amount of Rs. 1,44,000 of the trust fund has been utilised by the founder for his election purposes after making fictitious entries in the accounts of the trust. The materials in respect of all these items were before the Income-tax Officer at the stage of assessment. It is not alleged in these grounds that any material relevant to these items has been kept back by the assessee at that stage. Hence, there is no question of non-disclosure of primary facts by the assessee in this year so as to attract section 147(a) of the Act. For the year 1959-60 out of the many reasons given, one relates to the suppression of sales of newspaper to an extent of Rs. 53,552 as per the figures furnished by the Audit Bureau of Circulation and another relates to the lending of a sum of Rs. 10,000 to one Sankaralinga Iyer outside the books of the accounts of the trust. These grounds, if established, would come within the purview of section 147(a). For the year 1960-61 the three grounds set out are: (1) investment in allied concerns of the founder; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts placed before him. We are, therefore, of the view that in respect of this year section 147(a) cannot properly be invoked and, therefore, the relevant notice under section 148 should be held to be invalid. In relation to the year 1965-66 apart from the general allegations that the funds of the trust have been lent to allied concerns and that the entire 75 per cent. of the total income has not been utilised for charitable objects, two of the specific grounds are that there has been a lending of trust funds outside the accounts in a sum of Rs. 1,16,500 to one Srinagar Buildings Society and that there is a discrepancy of Rs. 68,174 between the petitioner's accounts and the accounts of Adityanar Educational Institution on the amounts actually spent for purpose of education. If these grounds are established they would certainly attract section 147(4). For the year 1966-67, of the many grounds given, one relates to the discrepancy of Rs. 9,74,624 between the accounts of the petitioner-trust and those of Adityanar Educational Institution on the amounts spent for education and the other to a sum of Rs. 56,000 said to have been deposited by various depositors whose names are not gi ..... 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