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TMI Blog1966 (2) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... levant accounting period being April 1, 1951, to March 31, 1952. The assessment of the said company was completed by the Income-tax Officer on August 4, 1953. He determined the company's business profits at ₹ 33,096 subject to the assessee's claim for unabsorbed depreciation brought forward to the extent of ₹ 40,000 and odd. Setting off the said unabsorbed depreciation to the extent of ₹ 33,096, the Income-tax Officer determined the total income of the assessee at nil. Now, during the course of the accounting year, the assessee-company had sold its concern to the Amalgamated Electricity Co. Ltd. under the indenture of date 19th September, 1951, for a consideration of ₹ 9,35,246-15-8. The resolution relating to this transaction was passed by the board of directors of the Amalgamated Electricity Co. Ltd. on 16th April, 1951, subject to its approval by the shareholders, and the board of directors of the Malegaon Electricity Co. Ltd. had passed a resolution relating to it on the 19th September, 1951, i.e., the very day on which the indenture was executed. Now, during the course of the assessment proceedings, the assessee-company informed by its letter da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 34: "Profits under section 10(2)(vii) have not been assessed: the company did not disclose this point." It may also be stated that, in seeking the permission of the Commissioner, the Income-tax Officer had sought permission to reopen the assessment under section 34(1)(a). After obtaining sanction from the Commissioner, the Income-tax Officer issued notice under section 34 of the Act on 29th March, 1957, and it was served on the assessee-company on the same day. The assessee-company thereafter filed a return showing the income at nil. The Income-tax Officer found that the profits made by the assessee-company under section 10(2)(vii) as a result of the sale transaction amounted to ₹ 4,88,386. Setting off the unabsorbed depreciation carried forward up to the date of sale, the Income-tax Officer determined the total income of the assessee-company at ₹ 4,48,893 and directed that demand notice be issued to the assessee. The assessee-company raised two contentions before the Income-tax Officer, viz., that the action under section 34(1)(a) is bad in law inasmuch as there was no new information which has come to the knowledge of the Income-tax Officer justifying t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the facts of the case and after applying his mind had come to the decision that no profits under section 10(2)(vii) could be taxed in the company's hands. Reliance was placed in support of this contention on the passage which we have reproduced above. The proceeding under section 34(1)(a) were, therefore, incompetent as there was no fresh material on which any action could be taken. The Income-tax Officer on reopening the assessment only re-examined the material on record and has come to a different conclusion from the conclusion to which the Income-tax Officer who made the original assessment had reached. The assessee-company also contended that all primary facts regarding the sale of the assets of the assessee-company were placed before the Income-tax Officer. The question whether, out of the transaction, profits taxable under section 10(2)(vii) arose or not was a question of merely an inference to be drawn from these primary facts. If the Income-tax Officer had failed to draw the proper inference, that cannot be a good reason for reopening the assessment under section 34(1)(a) of the Act. On behalf of the department, it was on the other hand contended that, though the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention raised on behalf of the department that at any rate the reassessment had been validly made under section 34(1)(b), the Tribunal held that, as the Income-tax Officer, who initiated the present proceedings for reassessment, did so under the belief that the assessee failed to disclose fully and truly all material facts necessary for its assessment, it was not open to the income-tax authorities to take resort to the provisions of section 34(1)(b). In this view of the matter, the Tribunal allowed the appeal. It may be stated that the Tribunal did not consider the contentions raised on behalf of the assessee relating to the merits of the case. To recall, it was the case of the assessee-company that the profits made under section 10(2)(vii) were not taxable inasmuch as no business was done by the assessee-company during the year of account. The merits of this contention have not been considered by the Tribunal. On an application made by the Commissioner of Income-tax, the Tribunal has referred to us the following two questions: "1.Whether, in the circumstances of this case, it can be held that, in the course of original assessment proceedings for the assessment year 1952 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the sale took place." "Written down value" has been denned in sub-section (5) of section 10 to mean the actual cost to the assessee in the case of assets acquired in the previous year and the written down value in the subsequent years is actual cost less all depreciation allowed to him under the provisions of the Act. The prescribed forms for making a return are different for different classes of assessees and are sub-divided into various parts. It is not necessary to go into details. We would be only referring to the material part thereof. Form C is a form of return prescribed for companies. Part I of Form C is sub-divided into various sections. Section D thereof requires an assessee to show income, profits or gains which he has not included in Sections A, B and C, but which the assessee claims to be not taxable for any reason such as that the receipt is of a casual nature not arising from any business, profession, or vocation or occupation or that it is exempt under any other provision of the Indian Income-tax Act, or that it is not accounted for in the books of account due to non-adjustment of account or for any other reason. It would thus be seen that un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment under section 34(1)(a) was valid. It is not in dispute that, in the circumstances, the Income-tax Officer had reason to believe that certain profits and gains chargeable to tax have escaped assessment. The question, however, that has to be considered is whether the escapement of the assessment was by reason of "omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for that year" It is the argument of Mr. Joshi that all primary or material facts have not been disclosed by the assessee either in its return or in the aforesaid documents which the assessee had filed before the Income-tax Officer. He contends that the most material fact that the sale price relating to plant, machinery and building exceeded the written down value had nowhere been clearly stated. It has not been so stated either in the return or in any of the documents or statements submitted by the assessee-company during the course of its assessment. The statement, on the face of it, does not show what the written down value was, and that, according to Mr. Joshi, amounts to a failure to disclose fully and truly the material facts neces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessment were disclosed by the assessee to the Income-tax Officer. On the other hand, it appears to us that the expression "all relevant facts" refers to the transaction of sale, the price for which the assets were sold and the break-up thereof. Paragraph 2 of the reassessment order of the Income-tax Officer itself shows that the reason given by the Income-tax Officer for holding that there was failure on the part of the assessee to disclose fully and truly all material facts was that the assessee failed to show the profits under section 10(2)(vii) in its return and that the mere production of some documents, account books or other evidence relating to the sale of assets was not sufficient to disclose the profits made. In other words, the finding of the Income-tax Officer was that the facts supplied by the assessee-company did not constitute disclosure of all the relevant material for the purpose of the assessment. The statement of the case also does not indicate that it was an admitted position before the Tribunal that all facts material for the purpose of assessment had been disclosed by the assessee during the course of its assessment and the only question wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which this finding has been given. Except the said cryptic sentence in the Income-tax Officer's order, what constituted the basis on which the Tribunal arrived at its aforesaid finding, it is difficult to find out. The profits that would normally fall under section 10(2)(vii) amounted to a large figure of ₹ 4,83,386. If the assessee was claiming an exemption in respect of this large amount of profits, it would be natural to expect that the assessee would be putting forward its claim in that respect in writing somewhere or other, either in the return or in the correspondence or communications made by the assessee to the Income-tax Officer. In contradistinction, we find that in its letter dated 2nd July, 1953, the assessee-company was giving reasons why it was not claiming depreciation on the assets relating to the assessment year. Thus, in our opinion, it is not possible to construe from the Tribunal's order that it was an admitted position before the Tribunal that all facts material for the purpose of assessment had been disclosed by the assessee and the only ground on which the department was contending that the case fell under section 34(1)(a) was the omission on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to take the value of the assets representing plant, building and machinery from the statement of the cost price supplied by the assessee and deduct therefrom the depreciation allowed in respect of these items and he could easily have found what the written down value was. It, therefore, cannot be said that the assessee-company had not disclosed the primary facts. Having regard to the circumstances of the case, it is not possible for us to accept this contention of Mr. Palkhivala. We have already stated that nowhere, neither in the return nor in any of the statements or its covering letters, the assessee-company had clearly stated that the profits, which would normally fall under section 10(2)(vii) have been made by the assessee and that the assessee was claiming an exemption from tax in respect of those profits for the aforesaid reasons. In other words, the fact that the assessee-company had obtained a price for plant, machinery and buildings in excess of its written down value was not disclosed in a clear manner to the Income-tax Officer. There can hardly be any doubt that the primary fact or the material fact for the assessment of the assessee was that the price obtained for p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d normally fall under section 10(2)(vii) and yet it did not, as required by law, disclose this fact in Part D of its return claiming exemption in respect thereof in a straightforward manner. During the assessment proceedings the aforesaid documents were produced at different times. By reading these documents it does not become apparent that the sale transaction had resulted in the assessee getting a price for its building, machinery and plant in excess of its written down value. No statement of the written down value of the assets sold was filed. Had this statement been filed, it could possibly have been argued that on reading this statement it became apparent from the record that the price fetched for the building, machinery and plant was in excess of its written down value. Mr. Palkhivala, however, argued that it was possible for the Income-tax Officer to ascertain this fact from the documents produced. In the statement the assessee had given the cost price of the building, machinery and plant. The assessee had also given a statement of the depreciation allowed. Deducting the amount of depreciation allowed from the cost price, the Income-tax Officer could easily have found what t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the assessee to disclose fully and truly all material facts necessary for its assessment within the meaning of section 34(1)(a) and this brings us to the next question. Now, the next question, as framed, indicates that the rival contentions were that, according to the department, even if the reassessment proceedings had been initiated under section 34(1)(a), reassessment could be made under section 34(1)(b) even though the case did not fall within the scope of section 34(1)(a), and the contention on behalf of the assessee was that, once the proceedings are initiated under section 34(1)(a), the reassessment could not be done under section 34(1)(b), even if the case fell within section 34(1)(b). Mr. Palkhivala frankly conceded that such is not the case of the assessee and it was not the contention of the assessee raised before the Tribunal. The contention of the assessee, on the other hand, was that, on the facts and in the circumstances of the case, reassessment cannot be sustained under section 34(1)(b) because there was no additional fact which had come into the possession of the Income-tax Officer in consequence of which he could have reason to believe that profits and gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssession". Facts in Rathinasaba-Sathy's case (Supra) were: There was a partition between a Hindu father and his sons, one of whom was a minor and the business carried on by the father was continued by a firm consisting of the father and his major sons, to the benefits of which the minor son was also admitted. The partition was recognised by an order under section 25A and the firm was also registered for the purpose of income-tax. In his return, the father did not include the income of the minor son from the minor's share in the firm and an assessment was made on the father's income without including in it the minor's income. The minor included this income in his own return and was assessed on this income. Subsequently, the Income-tax Officer discovered that he had committed an error and made a reassessment under section 34 including the minor's income in the father's income. The question that arose was whether the realisation of the mistake on the part of the Income-tax Officer after completing the original assessment that he had omitted to include the minor's share income in the father's total income was "information" with in the mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e- tax Officer had omitted to bring to assessment a certain sum representing interest on arrears of rent due to the assessee in respect of agricultural land on the ground that the amount was agricultural income. Subsequently, the Privy Council, on an appeal from that decision of the High Court, held that interest on arrears of rent payable in respect of agricultural land was not agricultural income. After the said decision of the Privy Council, the Income-tax Officer reopened the assessment under section 34(1)(b). The question was whether, in the circumstances, the correct position in law, as stated by the Privy Council, was an information within the meaning of section 34(1)(b). Their Lordships held that, to bring into play section 34(1)(b), there must be two conditions present: the Income-tax Officer must have some information which has come into his possession subsequent to the making of the assessment order, which he seeks to reopen under section 34(1)(b) and the information must be such as would lead to his belief that income chargeable to tax has escaped assessment. The contention that was raised on behalf of the assessee before their Lordships was that the word "informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been obtained by the Income-tax Officer subsequent to the completion of the original assessment and that would, in our opinion, amount to information within the meaning of section 34(1)(b). A distinction has to be made between facts, which are clearly or patently on the record and facts, which could be gathered or could have been gathered with due diligence by elaborately correlating the various facts on the record. As regards the former, it can, without hesitation, be said that the information as to the facts, which are patently or clearly on the record was within the possession of the Income-tax Officer at the time of the original assessment. The same cannot be said of the latter because the correct factual position emerges only after the Income-tax Officer has correlated the various facts and ascertained what the resulting position is. Knowledge secured in the latter case, subsequent to the assessment, in our opinion, is "information" within the meaning of section 34(1)(b). The decision, on which reliance has been placed by Mr. Palkhivala, does not run in any manner counter to the view which we have taken. Facts in Dr. M.R. Dalai v. Commissioner of Income-tax [196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Officer, who dealt with the assessment of Dr. Dalai for the assessment year 1952-53, to carry in his mind all the information contained in the old record or to read the old record. We have no hesitation in accepting Mr. Joshi's argument that it would not be reasonable to expect the Income-tax Officer to carry in his head all that is contained in the old records. But it is difficult to accept his contention that it would not be reasonable to expect the Income-tax Officer referring to the old records which are relevant for the assessment with which he is dealing. Apart from it, it would not be unreasonable to expect that a note is taken of the relevant information which is useful for subsequent assessments of the assessee, and a note thereof is kept on record." It would thus be seen that, having regard to the circumstances of the case, it has been held that the information that the trust had become revocable, which was material and relevant for the assessment, must have been on record or was available on the record and, therefore, no fresh information within the meaning of section 34(1)(b) was obtained by the Income-tax Officer subsequent to the original asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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