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TMI Blog1972 (12) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... eting the decision of the Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer lays down the correct principles, in view of the decisions of the Supreme Court in S. Narayanappa v. Commissioner Of Income-tax, Kantamani Venkata Narayana and Sons v. First Additional Income-tax Officer and Sowdagar Ahmed Khan v. Income-tax Officer. Moreover, after the matter was partly heard by us, the decision of the Supreme Court in Commissioner of Income-tax v. Burlop Dealers Ltd. was reported and the matter before us has to be considered in the light of this latest decision. We have heard the learned advocates of both the sides regarding this decision. The facts giving rise to this reference may be shortly stated: The assessee is a Hindu undivided family and the relevant year of account is S. Y. 2,000, i. e., November 30, 1943, to October 17 1944. The assessment year is 1945-46. On January 23, 1947, the assessee was originally assessed in respect of this particular assessment year and the total income of the Hindu undivided family was held to be Rs. 67,605. It appears that in the course of S.Y. 2,000, the karta of this Hindu undivided family had entered into an agreement to purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and they had striven hard for raising the balance required for the purpose. The purchaser had not given up hopes till the time of writing that letter; and he requested the assessee to re-consider his notice and give a further opportunity of 15 days from November 18, 1944; and the letter proceeds: "and should we fail even then to pay you the balance and complete the sale, you may exercise your right, that is to say, the forfeiture may then stand good." At the time when the original assessment was completed on January 23, 1947, the original agreement by which the assessee agreed to purchase the property from Ambalal Sarabhai, the agreement to sell a portion of this property to Messrs. K. Nagardas and Co., the receipt for the payment of Rs. 1,05,000 dated June 14, 1944, and the correspondence between the assessee's pleader and the reply, dated November 18, 1944, were all produced before the Income-tax Officer; and after perusing all those documents, he completed the assessment on January 23, 1947. At the time of that assessment order, no reference was made in the assessment order itself to this transaction of the amount of Rs. 3,05,000 but a note was made on January 23, 1947, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan of Rs. 2,00,000 to the assessee and that this loan was returned by the assessee in the middle of S. Y. 2002. Nagardas also stated in the course of that inquiry before the Income-tax Officer, Surendranagar, that the sum of Rs. 2,00,000, which he advanced was not from the fund of M/s. K. Nagardas and Co. but was advanced from his personal fund. This information was passed on to the Income-tax Officer having jurisdiction over the assessee's case. The information which was thus received from the Income-tax Officer, Surendrangar was materially different from what was furnished by the assessee in 1947 at the time when the original assessment was completed and hence the Income-tax Officer considered that there had been omission or failure on the part of the assessee to furnish correct facts at the time of the original assessment; and he, therefore, issued a notice under section 34(1)(a) of the Act for the assessment year 1945-46; and this notice was served on the assessee on March 30, 1954. Pursuant to this notice, the assessee filed a return on April 2, 1954, but he challenged the validity of the proceedings under section 34(1)(a). In spite of this challenge, the Income-tax Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee had not been given p roper opportunity to cross-examine Nagardas and Kamdar, on whose evidence the Income-tax Officer had relied in the reassessment proceedings. Against this order of the Appellate Assistant Commissioner, the assessee went in appeal to the Tribunal and raised two contentions. He urged before the Tribunal that the assessee's case fell under section 34(1)(b) and not under section 34(1)(a); and, secondly, he contended that the Appellate Assistant Commissioner was not justified in setting aside the assessment and directing the Income-tax Officer as to how that officer should proceed with the assessment. By its order, dated February 14, 1956, the Tribunal rejected both the contentions. As regards the contention that the case of the assessee fell under section 34(1)(b) and not under section 34(1)(a), the Tribunal dealt with that point in paragraph 3 of its order and the relevant portion is in these terms: "In so far as the Income-tax Officer was concerned, he believed the statement of Nagardas. He, therefore, had reason to believe that the assessee did not disclose fully and truly all material facts necessary for his assessment. It appears that at the time of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal on the earlier occasion and the Tribunal had rejected all the contentions of the assessee including this particular contention. The Tribunal upheld the preliminary objection and came to the conclusion that the assessee was not entitled to question the jurisdiction of the Income-tax Officer to issue the notice under section 34(1)(a) after the remand by the Tribunal. The Tribunal on the second occasion pointed out that in view of the Supreme Court decision on the point, the earlier decision of the Tribunal was not sound but the Tribunal further pointed out that the earlier decision should have been challenged by the assessee before the High Court. The Tribunal also considered the assessee's contention on merits and held that, on the basis of the information received from the Income-tax Officer, Surendranagar, the Income-tax Officer in charge of the assessee's case could entertain an honest belief that the information given by the assessee in 1947 was not correct and the assessee's objection to the issue of the notice under section 34(1)(a) was rejected. The Tribunal also held that the reassessment was completed within the period of limitation. The Tribunal examined the justificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the notice under section 34(1)(a) was not concluded against the assessee or decided against the assessee. In view of that particular conclusion of the Tribunal, it is obvious that since the matter regarding the validity of the notice under section 34(1)(a) was left open and was not concluded against the assessee, the assessee could not have come to the High Court on a reference against that particular conclusion of the Tribunal. Under these circumstances. the learned Advocate-General, appearing on behalf of the revenue, very fairly stated that he was not pressing the first question and that the first question should be answered in the affirmative and the court should decide the main question which is the second question in this case. In view of this statement of the learned Advocate-General, we will now proceed to examine the legal point arising from the second question. Section 34(1)(a) of the Act, so far as is material for the purposes of this judgment, provided at the relevant time as follows: "34. (1) 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 of his income under section 22 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 34 did not have any material before him for believing that there had been any material non-disclosure by reason of which an under-assessment had taken place. The Income-tax Officer had no jurisdiction to issue the notices after the expiry of four years from the end of the assessment year, and the company was, therefore, entitled to an order directing the Income-tax Officer not to take any action on the basis of the notices. For the purposes of this judgment it is not necessary to set out the facts of that particular case; but it may be mentioned at this stage that the Supreme Court drew a distinction between material facts which the assessee was bound to disclose and inferences to be drawn from these material facts which the assessee was under no obligation to disclose; if the assessee puts all the material facts or what have been referred to in the subsequent decisions as "primary facts", he has disclosed all that he is bound to do and merely because a different inference is to be drawn from those primary or material facts, according to the revenue, it cannot be said that there was omission or failure on the part of the assessee to disclose truly and fully all material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al jurisdiction is that the Income-tax Officer had when he assumed jurisdiction some prima facie grounds for thinking that there had been some non-disclosure of material facts.' The Supreme Court also observed that it is the duty of the assessee who wants the court to hold that jurisdiction was lacking, to establish that the Income-tax Officer had no material at all before him for believing that there had been such non-disclosure. Though the court cannot investigate into the adequacy or otherwise of the grounds on which the reason to believe on the part of the Income-tax Officer rests, the assessee is entitled to show that there was no material at all on which the Income-tax Officer could found such belief, that is, have reason for such belief. If, therefore, an assessee is in a position to show that he had disclosed at the time of the original assessment all that he was bound to disclose, i.e., all the primary facts relevant to and having a bearing on his assessment, there would be no ground for the Income-tax Officer to have reason to believe that there was any omission or failure on the assessee's part to disclose. Similarly, if an assessee can show that, though there was omis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid firm in the relevant year of account. Two amounts of Rs. 6,380 and Rs. 5,936 were found credited in the books of the firm in the personal account of the petitioner on November 1, 1957. During the assessment proceedings for the assessment year 1959-60, the petitioner contended that the sum of Rs. 5,936 represented sale proceeds of ornaments and produced the receipts for the sales. The Income-tax Officer did not accept this case, and, holding that the sum of Rs. 5,936 represented income from an undisclosed source and as such could not be included in the assessment year 1959-60 but should be assessed only in the assessment year 1958-59, left it out of account in the assessment for the assessment year 1959-60. Later, he issued a notice on May 15, 1964, in respect of the said amount of Rs. 5,936 for the assessment year 1958-59 under section 147(a) of the Income-tax Act, 1961, as income which had escaped assessment; and the learned judge of the Allahabad High Court held that the notice issued after a lapse of four years was without jurisdiction. The learned judge relied upon the decision of the Supreme Court in Calcutta Discount.Co.'s case. An attempt was made on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was further held that merely because the reassessing authority wants to draw a different inference from the one which had been drawn by the original assessing authority, he cannot, for that reason, reopen the assessment under section 34(1)(a). He can do so only if he has reason to believe that material facts necessary for the assessment had not been disclosed fully and truly at the time of the original assessment. On the facts, it was held by the Division Bench that on the first occasion the assessee had placed before the assessing authority the basic facts necessary for his assessment and that the Income-tax Officer had no material on which he could come to the conclusion that a part of the assessee's income had escaped assessment on account of the failure of the assessee to disclose fully and truly all material facts necessary for such assessment. We may point out that in this decision of the Andhra Pradesh High Court, the decisions of the Supreme Court in Kantamani Venkata Narayana, and Sons v. First Additional Income-tax Officer and S. Narayanappa v. Commissioner of Income-tax were referred to as instances where the Supreme Court interpreted the scope of section 34(1)(a). I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lcutta Discount Co.'s case held that, as the primary facts as appearing from the return had been disclosed to the Income-tax Officer, the petitioner's conduct could not come within the ambit of clause (a) of section 147 of the Act of 1961, and that on the facts the case really lay within the four corners of clause (b) of section 147 and hence the Income-tax Officer had acted without jurisdiction in issuing a notice under section 147(a). This decision also does not help us in deciding the particular matter before us. In Rai Singh Deb Singh Bist v. Union of India, a Division Bench of the Delhi High Court considered the provisions of section 34(1)(a); and there the facts which were relied upon by the revenue authorities as indicating that the entries in the earlier years of account were bogus, came into existence much later after the closing of the relevant years of account; and on the basis of those facts which subsequently came into existence and on the basis of the valuation arrived at by the Income-tax Officer on his own subsequent inquiries, he wanted to proceed under section 34(1)(a); and it was held that since the facts on which the Income-tax Officer wanted to rely had come ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der-assessment' had occurred by reason of either (i) omission or failure on the part of an assessee to make a return of his income under section 22, or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. These conditions are cumulative and precedent to the exercise of jurisdiction to issue a notice of reassessment: Calcutta Discount Co. Ltd. v. Income-tax Officer." In that case, the judgment of the Allahabad High Court was set aside by the Supreme Court and the case was remanded for determination of the issue as to whether by reason of the omission or failure on the part of the company to disclose fully and truly all material facts necessary for assessment of the company for the three years in question, any income, profits or gains chargeable to income-tax had escaped assessment. Again this decision of the Supreme Court in Modi Spinning and Weaving Mills Co.'s case, does not throw any further light on the principles governing issuance of notice under section 34(1)(a). As against these different decisions of this High Court, Allahabad High Court, Andhra Pradesh High Court, Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o put it differently, it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings under section 34 of the Act is open to challenge in a court of law." In this passage, Ramaswami J. has pointed out that the correct legal position is that if there are some reasonable grounds for the Income-tax Officer to believe that there had been non-disclosure of material facts, that would be sufficient to give him jurisdiction to issue the notice under section 34. The action of the Income-tax Officer in starting proceeding under section 34 is open to challenge in a court of law only to a limited extent, viz.: (1) whether the Income-tax Officer held the belief that there had been such non-disclosure; and (2) the belief must be held in good faith; it cannot be merely a pretence; and it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing upon the formation of the belief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee can contend that the Income-tax Officer did not in fact hold the belief that there had been such nondisclosure. Secondly, the belief must be held in good faith. It cannot be merely a pretence. Barring this limited challenge to the action of the Income-tax Officer for initiating action under section 34(1), if there are reasonable grounds for the Income-tax Officer to believe that there had been non-disclosure of any facts, which could have a material bearing on the assessment of the assessee, that would be sufficient to give him jurisdiction to issue a notice under section 34 of the Act. In Sowdagar Ahmad Khan v. Income-tax Officer, the Supreme Court dealt with the question of issuance of the notice under section 34(1)(a). There, after the original assessment of the assessee for the assessment year 1943-44 was completed, the Income-tax Officer found that the assessee had a current account in the name of his father-in-law till the latter's death. that the assessee had failed to disclose the advance of a sum of Rs. 70,000 and that in the relevant returns the assessee had not shown income from property in the names of his sons, wife and daughter though many of the properties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase the decision in Kantamani Venkata Narayana Sons' case was relied upon by the Supreme Court. In Commissioner of Income-tax v. Burlop Dealers Ltd., the facts before the Supreme Court were as follows: The assessee was a limited company. The assessee stated at the time of filing of its return for the assessment year 1949-50 that on June 5, 1948, it had entered into an agreement with H. Manory Ltd. to do business in plywood chests and in consideration of financing the business, the assessee was to receive 50% of the profits of the business. The assessee also claimed that it had entered into an agreement on October 7, 1948, with Ratiram Tansukhrai for financing the transactions of H. Manory Ltd. in the joint venture, and had agreed to pay to Ratiram Tansukhrai 50% of the profit earned by it from the business with H. Manory Ltd. Stating these facts, for the assessment year 1949-50, the assessee submitted the profit and loss account disclosing in the relevant year of account Rs. 1,75,875 as profit in a joint venture from H. Manory Ltd. It also claimed that an amount of Rs. 87,937, being half of the amount of this profit from H. Manory Ltd., has been paid by the assessee to Ratira ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s view the Tribunal reversed the order of the Appellate Assistant Commissioner and directed that the amount of Rs. 87,937 be excluded from the total income of the assessee for the year 1949-50. The Tribunal declined to state the case to the High Court under section 66(1). A petition to the High Court under section 66(2) for directing the Tribunal to state the case was rejected by the High Court and thereafter an appeal was preferred by special leave to the Supreme Court. These were the facts before the Supreme Court and while interpreting section 34(1)(a), in the light of the decision of the Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer, Shah J., delivering the judgment of the court, observed at page 612 of the report: "We are of the view that under section 34(1)(a) if the assessee had disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income-tax Officer about the inference which the Income-tax Officer may raise from those facts. The terms of the Explanation to section 34(1) also do not impose a more onerous obligation. Mere production of the books of account or other evidence from which material facts could with due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are reasonable grounds for him 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, the issuance of the notice under section 34(1)(a) would be valid. It is not for the court to consider whether these grounds are adequate or not. The sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. Moreover, the assessee is not bound to put forward before the Income-tax Officer at the time of the original assessment a version contrary to what he contends for or contrary to what he has written in his books of account. In certain circumstances the question whether a particular transaction is genuine or not is an inference to be drawn from primary facts. If the assessee has disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income-tax Officer about the inference which the Income-tax Officer may raise from those facts. Further, where on the evidence and material produced at the time of the original assessment the Income-tax Officer could have reached a conclusion other than the one which he has reached, the proceeding und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be sold to M/s. K. Nagardas and Co. and he has used the word "a handy person" while referring to M/s. K. Nagardas and Co. All the facts from which the necessary inference can be drawn were before the Income-tax Officer who made the original assessment. It was not for the assessee to point out what possible inference can be drawn by the Income-tax Officer making the original assessment at the time when the assessment was made in 1947. As the Supreme Court has pointed out, the only obligation on the assessee was to place all the primary facts before the Income-tax Officer who made the original assessment and once he placed those primary facts his obligation came to an end. It was open to the Income-tax Officer to draw an inference adverse to the assessee when he passed the order on January 23, 1947, regarding the entire transaction in favour of M/s. K. Nagardas and Co., yet instead of drawing an adverse inference against the assessee, the Income-tax Officer rested himself content with observing that the matter between the assessee and M/s. K. Nagardas and Co. had not been finally settled and the assessee was in possession and ownership of the whole property known as Maganbhai's Va ..... X X X X Extracts X X X X X X X X Extracts X X X X
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