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TMI Blog1976 (11) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... son why the Income-tax Officer considered that these provisions for clubbing were applicable was that the entire capital of Rs. 80,000 contributed by the assessee's wife and minor son came from the assessee himself. The assessee, prior to 1947, had been carrying on extensive business in his individual capacity in various places which subsequently became part of Pakistan. After partition he came down to India and in December, 1947, he started a business in Bombay in motor spare-parts in the name of Standard Garage. The assessee's family joined him in Bombay some time in 1948. On 1st April, 1949, the business of Standard Garage was taken over by a partnership consisting of the assessee's major son, Jaidev Tekchand Dolwani (who is the assessee's son by the first wife who died in 1935) and Smt. Haribai, the assessee's second wife, whom he married in 1936. To the benefits of this partnership the assessee's minor son, Vishindas (by his second wife) was admitted. The share of Jaidev was 5 annas 6 pies in a rupee, while the shares of Haribai and Vishindas were 5 annas 3 pies each. The latter two parties invested Rs. 40,000 each in the partnership. This firm of Standard Garage was assessed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee ; and (3) On a proper construction of section 16(3) it could not be said that that section was applicable to profits from business even assuming that the wife and the minor son received the capital contributed by them from the assessee. The Tribunal found in favour of the assessee on the first of these three grounds and did not choose to give its findings on the other two grounds, although it recorded the rival contentions pertaining thereto. According to the Tribunal, it was not possible to say that the 1st Income-tax Officer, D-II Ward, who purported to reopen the proceedings had information that income had escaped assessment, and, accordingly, it held that action under section 34(1)(b) was taken without jurisdiction. On that limited footing and not on the merits of the other two contentions, the assessee's appeal was allowed by the Tribunal. It may be pointed out that according to the Tribunal, its decision was based on the view of the statutory provisions taken by the Nagpur High Court in D. R. Dhanwatay v. Commissioner of Income-tax [1956] 29 ITR 257 and by the Bombay High Court in Dr. M. R. Dalal v. Commissioner of Income-tax [1963] 49 ITR 492. The Appellate Assistant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... squarely within the observations of Chandrachud J. made in the above Bombay case, which observations have been approved by the Supreme Court in Kalyanji Mavji's case [1976] 102 ITR 287 (SC). According to counsel's submission, the view taken by the 1st Income-tax Officer represented a change of opinion unsupported by subsequent information and not a change of opinion based on information subsequently obtained. In the latter case, it was submitted that re-opening would be with jurisdiction ; in the former case the reopening was improper and the view taken by the. Tribunal holding it to be so was liable to be confirmed. In these circumstances, it becomes necessary to consider these authorities and to decide in the first place the proper principles of law as are applicable to the question of re-opening of assessment under the provisions contained in section 34(1)(b) of the Indian Income-tax Act, 1922. However, before doing so, one further argument which counsel for the assessee sought to advance before us may be stated and rejected. It was submitted by him that, before action of reassessment under section 34(1)(b) can be considered to be valid, two conditions were required to be satis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asonable belief of having escaped assessment had in fact not escaped assessment or were in fact not liable to be assessed as income of the, assessee. A full consideration of any such aspect of the matter will only arise at a later stage of the proceedings ; and, with respect to the learned counsel for the assessee, it will not be possible for us to consider this aspect of the matter whilst considering whether the Tribunal was right in coming to the conclusion that the proceedings by way of re-opening had not been validly initiated. As a matter of fact, the Tribunal itself has not at all applied its mind to any such argument and, thus, it cannot be considered to be an aspect arising from the order of the Tribunal. It becomes necessary, therefore, to briefly refer to the Nagpur, Bombay and the Madras authorities indicated in the order of the Tribunal and the two later decisions in Holck Larsen's case [1972] 85 ITR 467 (Bom) and Kalyanji Mavji's case [1976] 102 ITR 287 (SC), which decisions came to be given after the Tribunal decided the appeal in question in favour of the assessee. In Dhanwatay's case [1956] 29 ITR 257 (Nag), a Division Bench of the Nagpur High Court consisting of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a limited company, which was one of the executors of the trust, had filed a return of income in which the Income-tax Officer noticed that the period of seven years during which the trust had been made irrevocable had expired, after which the trust was liable to be considered to be a revocable trust, and hence the entire income from the trust property was assessable in the hands of Dr. Dalal. This Income-tax Officer communicated his reading of the provisions of the trust deed to the Income-tax Officer who had completed the assessment of Dr. Dalal's income, who thereupon issued a notice under section 34(1)(b) and initiated reassessment proceedings. His jurisdiction to do so was challenged and it was held by the court that the action taken by the income-tax authorities under section 34(1)(b) could not be justified. According to the court, all the relevant facts, materials and documents were available on the record of the case of Dr. Dalal to the Income-tax Officer, who had made the original assessment on 27th January, 1954. Therefore, in the opinion of the court, it could not be said that any fresh information had come into the possession of the Income-tax Officer merely by reason th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. H. Holck Larsen [1972] 85 ITR 467 (Bom), the question which a Division Bench of the Bombay High Court was required to consider was the validity of reopening of assessment proceedings under section 34(1)(b) of the Act of 1922. The assessee, in that case, had shown certain profits arising from the sale of shares held by him in a limited company as capital gains on the footing that the shares were held by him as investment ; and his claim to be an investor was accepted by the Income-tax Officer who had also accepted similar claims in the previous years. The assessments for the two years in question were completed on 29th January, 1958, and 9th October, 1958, respectively. The very same Income-tax Officer then took up assessment proceedings for the two subsequent years. In the course of those proceedings he reviewed the entire course of transactions from the year 1946, and held that though the assessee was an investor till 31st March, 1954, he had converted his investment shares into stock-in-trade after 1st April, 1954, and had become a dealer in shares. Accordingly, the Income-tax Officer brought to tax the profits made by the assessee by sale of shares as business profits. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court it is observed by Chandrachud J. that :......... a mere change of opinion would not justify the reopening of an assessment ........" However, this aspect of the matter is thereafter crystallised and clarified in a passage to be found at page 479 of the report, which passage may be fully set out as it is subsequently indicated with approval in the decision of the Supreme Court in Kalyanji Mavji's case [1976] 102 ITR 287. It may further be mentioned that this passage is to be found after the learned judge has dealt with the two decisions of the Supreme Court in A. Raman & Co.'s case [1968] 67 ITR I 1 and Anandji Haridas's case [1968] 21 STC 326 (and which later decision was on a similar provision under the Sales Tax Act). The passage may now be extracted (See 85 ITR 479): " But, it is still true to say that a mere change of opinion would not justify the reopening of an assessment under section 34(1)(b) of the Act. It does not matter whether the Income-tax Officer obtains information from his own record or whether he receives information from an outside source. What is obligatory in order to apply section 34(1)(b) is that he must have 'information' in his possession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted the return, but on an appeal to the Appellate Assistant Commissioner, the assessment was reduced by a sum of Rs. 9,200. For the next assessment year 1957-58, the assessee-firm showed the same income and the deduction claimed was allowed. The next year 1958-59, however, presented a different complexion. In that year, the Income-tax Officer concerned perhaps suspected the correctness of the return and found that the amount of deduction claimed had been utilised for giving interest-free loans to the partners for clearing up their income-tax dues. Since the loan could not be said to be one incurred for the expenses of the partnership business, the said claim of deduction was rejected. This discovery led the Income-tax Officer to issue notice to the assessee under section 34(1)(b) for reopening the assessment of the year 1956-57 on the ground that the deduction having been wrongfully allowed, taxable income had escaped assessment. After hearing the assessee, the Income-tax Officer completed the assessment and included a further amount of Rs. 43,116 in the total income shown by the assessee. The assessee's appeal to the Appellate Assistant Commissioner was dismissed ; but the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer. This is obviously based on the principle that the tax-payer 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." It ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly. But it would be appropriate before embarking upon such chronological investigation to deal with the order of the 1st Income-tax Officer. The said order has been made part of the statement of case as annexure " B ". The first paragraph of the same reads as follows : " The assessment for the year was reopened under section 34(1)(b) as it was found that the incomes derived by the assessee's wife and a minor son as partners of M/s. Standard Garage were liable for inclusion in the total income of the assessee under section 16(3)(a)(iii) and (iv) of the Indian Income-tax Act, 1922, and in fact not included." The remaining portion of the said order is not material for our purposes as it deals with the contentions of the assessee and what transpired during the fresh (reopened) assessment. Now, fairly analysed, the only thing mentioned in this order and stated as the reason for reopening was that the 1st Income-tax Officer, Hira Singh, found that the incomes of the assessee's wife and minor son as partners of M/s. Standard Garage were liable for inclusion under the statutory provisions mentioned in the said para. viz., section 16(3)(a)(iii) and (iv) of the Act of 1922 and in fact o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 31-3-46, by which he gave Rs. 60,000 to Jaidev and Rs. 40,000 each to the others. There were two objects in the formation of the firm to take over the garage. One was to prevent Mr. Tekchand Chandiram being declared an evacuee by the Pakistan Government, and the other to set up his elder son in business. That the income from the firm really goes to Mr. Tekchand Chandiram is forcibly denied. Mr. Tekchand Chandiram has other interest income in India and he is assessed in D-II Ward. His interest in the above firm is to be intimated to the ITO, D-II Ward. " In the first para. of the said note the said officer has clearly given his finding that whatever capital the partners themselves have contributed is from gifts made by Mr. Chandiram (obviously a reference to the assessee, though by the wrong name) under the gift deed dated 31st March, 1946, by which he gave Rs. 60,000 to Jaidev (the major son) and Rs. 40,000 each to the other two, i.e., his second wife and the minor son, Vishindas. It is also clear that, within the expression " partners ", the minor son, Vishindas, who is admitted to the benefit of the partnership is also included. The final para. of the said note contains a di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the other for the registered firm of M/s. Standard Garage were in charge of the very same officer, viz., R. S. Bhagwat. For this year, according to the Tribunal, the assessment of the firm was completed on 25th November, 1958, whereas that of the assessee for the very same year was completed on 27th January, 1959. The Tribunal in its order has observed that it would appear that there is no duty cast on the Income-tax Officer when he was handling a particular assessment to ascertain whether there was any connected case in the file which should be seen before deciding the case be fore him. This proposition was sought to be applied in favour of the department to rebut the submission that when the Income-tax Officer, Bhagwat, completed the assessment of the assessee it was his duty to consider and bear in mind the earlier assessments he had made of the registered firm of Standard Garage. It appears to us that the question is not whether there was any other assessment from which the said officer could have ascertained the true position, but whether by reason of the earlier note which bad been directed to be sent to the Income-tax Officer dealing with the case of the assessee there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. See Commissioner of Income-tax v. Prem Bhai Parekh [1970] 77 ITR 27 (SC). This discussion would indicate at least three clear aspects which are required to be borne in mind : (1) that certain findings and conclusions had been arrived at by the Income-tax Officer, Gopalkrishnan Nair, who had dealt with the first assessment of the registered firm of Standard Garage and who had directed the substance of his finding and conclusion as far as the assessee was concerned to be communicated to the Income-tax Officer in D-II Ward, dealing with the individual assessment of the assessee ; (2) that even on this factual finding two opinions were possible on the question whether the entire amount or share of profits which came to these two parties could in law be added to the income of the assessee-clubbed with his income under the provisions contained in section 16 of the Indian Income-tax Act, 1922 ; and (3) that from 1950-51 to 1957-58, i.e., right up to the time when the assessee's file was transferred to the 1st Income-tax Officer, the officers concerned did not in fact apply the provisions contained in section 16 to the profits derived by the assessee's wife and his minor son, V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that in such a case fresh findings should be sought for from the Tribunal on such factual aspect as the High Court may require for properly answering the question referred to us. It is true that to a certain extent the findings of the Tribunal even on this aspect of the question are not as complete and not as exhaustive as we would like them to be. The reason for this is also quite obvious, The Tribunal had proceeded to apply the principles laid down by the Nagpur High Court in Dhanwatay's case [1956] 29 ITR 257 and the Bombay High Court in Dr. Dalal's case [1963] 49 ITR 492 (the latter decision being binding on the Tribunal) and for the application of these principles the findings reached by the Tribunal and as indicated in its order and the statement of case were quite sufficient. What has been decided in these two cases can no longer be held to be a satisfactory enunciation of the correct legal position by reason of the subsequent decision of our own High Court in Holck Larsen's case [1972] 85 ITR 467 (Bom) and the decision of the Supreme Court in Kalyanji Mavji's case [1976] 102 ITR 287. In an appropriate case, perhaps, the course suggested by learned counsel for the reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d no Income-tax Officer (or any other person) can today from his memory be able to state exactly what had happened and what had not happened during this period. At this length of time it would be difficult for any officer to remember what exactly was done or the reason or the basis of his action. As indicated earlier, it can be contended that it is for the revenue to justify the reopening and to satisfy the Tribunal or the court that there has not been a change of opinion unsupported by fresh information or discovery but a change of opinion supported and based upon such fresh information which may be even from the record itself or realisation of an earlier error or discovery. If once this position is accepted, then it would be clear that it was for the revenue to have brought the necessary evidence on the record. If there is any lacuna on the record, then such lacuna would amount to failure on the part of the revenue to carry out its obligations in this behalf particularly since the assessee has been challenging the action, viz., the decision of the first Income-tax Officer to reopen the assessment from the very inception. After this long interval of time it would appear that it wo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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