TMI Blog1964 (6) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... chargeable to income-tax have escaped assessment or have been under-assessed or assessed at too low a rate. It is the case of the petitioner that the respondent, when he issued the impugned notices, had no reason to entertain the belief that the petitioner had omitted or failed to disclose fully and truly all the material facts necessary for his assessment for the said years, or that the petitioner's income in those years had been under-assessed. According to the petitioner, he was at one time carrying on business at Nankana Sahab in West Punjab. His business in West Punjab was in the process of winding up since about 1936. In 1936 he came to Bombay for some probate proceedings and did business in Bombay from 1937. He had to go to West Punjab from time to time in connection with the winding up of his business there. In 1942, notices were issued on him by the income-tax authorities at Bombay under section 34 of the Income-tax Act, 1922, for the purpose of assessing his income for Samvat years 1994 to 1997 (assessment years 1939-40 to 1942-43). After due enquiry, assessment orders in respect of these years were issued on 19th April, 1943, by one Kazi, who was then the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailed to state in the balance-sheet of Samvat year 1998, which he had filed and which is now lost, the alleged outstandings of the Punjab business amounting to about ₹ 7 lakhs. For Samvat year 1999 (assessment year 1944-45) the petitioner was assessed by an order dated 28th February, 1945, passed by the then Income-tax Officer, Gopinathan. According to the petitioner, he had produced during the assessment proceedings a balance-sheet for Samvat year 1999 and a statement of account, both of which showed the outstandings of the Punjab business. The balance-sheet and the statement of account alleged to have been filed by the petitioner during this proceeding are not found in the records of the department. Even the assessment order and the examination report for that year are missing. For Samvat year 2000 (assessment year 1945-46) the petitioner was assessed by an order dated 22nd May, 1946, issued by the then Income-tax Officer, Pradhan. According to the petitioner, he had then filed a balance-sheet for that year as well as a statement of account, both of which referred to the Punjab outstandings. The statement of account alleged to have been filed by the petitioner is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is inquired about He claimed that from before Samvat year 1917 he had practically the same capital as was there in the year 2000 . He claimed that he had filed copies of accounts, showing the receipts from the outstandings of the Punjab business. It appears that the enquiry remained in abeyance for some time and was resumed in 1957. On 17th September, 1957, the then Income-tax Officer Modak, wrote to the petitioner (copy of the letter produced at exhibit H) asking specifically for certain clarifications of the points mentioned in the petitioner's letter dated 20th October, 1954, referred to above. The contents of this letter clearly show that the Income-tax Officer was then in possession of the balance-sheets of Samvat years 1998 and 2000, but was unable to trace the balance-sheet of Samvat year 1999. He wrote to the petitioner: I find that there is no balance-sheet available on my record for S.Y. 1999. You have submitted balance-sheet for S.Y. 1998 and another copy of balance-sheet for S.Y. 2000 and therefore you might be in a position to submit the balance-sheet for the intervening period, i.e., S.Y. 1999 In the same letter, the Income-tax Officer has made a fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ond affidavit in further reply thereto. It is clear from his affidavits that he has no personal knowledge of the assessment proceedings for the years in respect of which he had issued notices for reassessment under section 34 of the Income-tax Act. He also does not claim that his information is derived from the Income-tax Officers of that time (Kazi, Gopinathan and Pradhan) or from any of the persons who were connected with the subsequent enquiries into the case of the petitioner. His information is exclusively based on the relevant assessment records of the petitioner and it cannot be denied that many of the relevant documents are no longer to be found in these assessment records. It is common ground that many documents which ought to be in the files of the department are no longer there. In respect of Samvat year 1997, the assessment order itself is missing. One page of the examination report of that year was available and a copy thereof has been admitted by me at exhibit J but the second page of that report is missing. For Samvat year 1998, the balance-sheet was admittedly filed, but is missing. The assessment order and part of the examination report of that year are available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the last words of the sentence which started with the words It is not adjusted . From the contents of this partly torn document, the respondent has drawn the following conclusion: ...It would appear that the capital account of the petitioner as disclosed by the balance-sheet for the S.Y. 1998 was only ₹ 14,000 while the balance-sheet filed for the S.Y. 2000 shows the capital account to the tune of ₹ 7 lakhs and odd. It is not the case of the petitioner that this capital increased during the S.Y. 1999 and 2000. As far as the assessment record of the petitioner is concerned, there was no material before the income-tax authorities which would show that the petitioner had such large amounts during the earlier assessment years. It was for this reason that it was necessary to reopen the assessment for the earlier years. The circumstances which confer jurisdiction on the Income-tax Officer to act under section 34(1)(a) of the Income-tax Act, 1922, were considered by the Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer [1961] 41 ITR 191 . Their Lordships observed: To confer jurisdiction under this section to issue notice...two conditions have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that of an honest and reasonable person based upon reasonable grounds. The Officer may act on direct or circumstantial evidence; but his belief must not be based on mere suspicion, gossip or rumour. The words used in the section are reason to believe and not reason to suspect (vide Bhimraj Panna Lai v. Commissioner of Income-tax [1957] 32 ITR 289 and Parimisetti Seetharamamma v. Commissioner of Income-tax [1961] 41 ITR 175). Turning to the first question, namely, whether the respondent had reason to believe that the income, profits or gains of the petitioner chargeable to income-tax had been under-assessed during the relevant period, it will be recalled that, according to the petitioner, the amount of ₹ 7 lakhs or so which was recoverable by him from various parties consisted of the out-standings of his business in West Punjab, which had come to an end by about the time when he came to Bombay, i.e., by 1936. The impugned notices under section 34 (1)(a) of the Income-tax Act, 1922, are in respect of the assessment years 1940-41 to 1945-46. If, as claimed by the petitioner, the assets of ₹ 7 lakhs or so were the outstandings of a business which had come to an end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner at the time of his assessment for the years prior to Samvat year 2000 was that he had these assets consisting of the Punjab outstandings to the extent of about ₹ 7 lakhs. As indicated above a case that the petitioner had these assets, but did not disclose them, is inconsistent with the respondent having any reason to believe that the petitioner was underassessed for the said years. In his arguments, Mr. G.N. Joshi stated that, according to the income-tax department, the omission or failure of the petitioner to make a full and true disclosure, which led to his under-assessment consisted of the omission or failure on his part to disclose that the amount of ₹ 7 lakhs or so was the income derived by him during the relevant period and did not really consist of the outstandings of his Punjab business, as made out by him. I am unable to find this case in the two affidavits filed by the respondent. However, even in the form in which Mr. G.N. Joshi has put the respondent's case, it amounts to this, that the respondent had reason to believe that the petitioner had shown in the balance-sheet of Samvat year 1998 that his capital consisted of ₹ 14,000 only ; tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the closing balance of the previous year. Moreover, it is clear from the immediately next sentence that the capital account was not adjusted by profit or loss, and this reference is necessarily to the capital account in the petitioner's books of account and not to the excess of assets over liabilities which might be regarded as the petitioner's capital. That this is the correct interpretation of these sentences in the examination report is corroborated by the contents of the examination report of the previous year (in respect of Samvat year 1997) a copy of which is produced at exhibit J. Even in respect of this examination report, only one page thereof is available and the next page is missing from the records of the department. In the assessment proceedings in respect of Samvat year 1997 as well as in the assessment proceedings for the previous years, the petitioner had not produced any balance-sheets. He had, however, produced his books of account. The examination report for Samvat year 1997 (exhibit J.) says : The books are maintained more or less on cash system. No capital account is kept where the loss of the previous years as well as this year is adjusted. The boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich are contained in a document which is partly torn and is not available in a complete form. On the other hand, there was ample material available to the respondent which would have led him to conclude that the balance-sheet of Samvat year 1998 did refer to the Punjab outstandings, and it is clear that the respondent did not take this material into consideration. Firstly, it was clear from the assessment reports in the possession of the respondent that the balance-sheet for Samvat year 2000 was produced during the assessment proceedings for that year. It also appears from the contents of the letter of the Income-tax Officer, Modak, dated 17th September, 1957 (exhibit H), that the balance-sheet of Samvat year 1999 was also produced during the assessment proceedings of that year, though it was not available to Modak at the time of writing the letter. If the balance-sheet of Samvat year 1998 had shown that the total capital (in the sense of the excess of assets over liabilities) consisted only of ₹ 14,000 and odd, then in the assessment of Samvat year 1999 or Samvat year 2000 a question would naturally have been raised by the then Income-tax Officer about the sudden increase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akhs) and to ascertain for himself that the petitioner's capital had remained unchanged during these two years. In my view, this piece of circumstantial evidence proves beyond doubt that the balance-sheet of 1998 did refer to the Punjab outstandings and that the outstandings were to the tune of about ₹ 7 lakhs. Moreover, in deciding whether the petitioner had represented to the Income-tax Officer in the year 1998 that his total capital consisted of ₹ 14,000 only, the respondent ought to have taken into consideration the fact that the representations made by the petitioner were not confined to the balance-sheet for the year 1998 filed by him. It is clear from the petitioner's letter of 17th September, 1957 (exhibit D to the petition), that, when the tax proceedings were initially started against the petitioner in Bombay, he had submitted a written statement to the Income-tax Officer explaining his antecedents. In the aforesaid letter of 17th September, 1957, the petitioner has requested the then Income-tax Officer to refer to this written statement and ascertain therefrom that be had disclosed everything relating to my West Punjab affairs in order to explain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that the Income-tax Officer could not possibly come to a reasonable conclusion either that the assessee was underassessed or that the assessee had not made a full and true disclosure of material facts, the Income-tax Officer is still entitled to rely on any one of such facts in isolation and by neglecting the other facts claim that his belief in the under-assessment or the non-disclosure, as the case may be, is reasonable. As I understand the observations of the Supreme Court, the test is whether the facts in the possession of the Income-tax Officer can lead to a reasonable belief that the assessee was either under-assessed or had omitted or failed to make a full and true disclosure; and if the court finds that such a belief can be reasonably entertained from the facts in the possession of the Income-tax Officer, the court will not further consider, whether, in its own view, such a belief was justified. In the present case, even the single fact which Mr. Joshi wants to be considered in isolation from other facts, namely, the contents of the examination report of Samvat year 1998 (part of exhibit I), cannot lead reasonably to the conclusion that the petitioner was underassessed du ..... X X X X Extracts X X X X X X X X Extracts X X X X
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