TMI Blog1975 (9) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment years 1951-52 and 1952-53, they were assessed under the said section and the total income was computed at Rs. 34,562 and Rs.2,09,486, respectively. The appellant has also alleged that similarly for the assessment years 1953-54, 1954-55, 1955-56 and 1956-57, assessments were made under the said section and the Income-tax Officer concerned determined the loss at Rs. 4,57,239, Rs. 6,12,343, Rs. 3,03,073 and Rs. 91,453, respectively. It has also been alleged that for the assessment year 1957-58, although the total income was computed at Rs. 1,54,696, ultimately there was a nil assessment for the said years after carrying forward the loss in respect of the earlier assessment years, and for the assessment year 1958-59 a loss to the tune of Rs. 1,07,988 was determined under the said section. It has further been alleged that for the assessment year 1959-60, assessment was completed under section 23(4) of the Act of 1922 and the income was determined at nil. It has also been alleged that for the assessment year 1960-61 the income was computed at nil after setting off the loss of Rs. 2,25,196 in respect of the assessment year 1953-54 and Rs. 3,40,813 representing a portion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere, therefore, understated by that amount. There is, therefore, reason to believe that income has escaped for assessment years 1957-58 to 1960-61 also. As the amounts received in July, 1960, could possibly be also considered for the assessment year 1961-62, action is necessary for that year also. In the circumstances mentioned above the approval of the Board/Commissioner of Income-tax is solicited under section 151(1)/(2) for issue of a notice under section 148 for assessment years 1950-51 to 1956-57. I have reason to believe that the income escaping assessment is likely to amount to Rs. 50,000 for the year." It appears that notices under section 148 of the Act of 1961 for the assessment years 1950-51 to 1957-58 were issued by the Income-tax Officer concerned after obtaining the necessary satisfaction and sanction of the Central Board of Direct Taxes and those for the assessment years 1958-59 to 1960-61 were issued after obtaining the necessary sanction and satisfaction of the Commissioner of Income-tax (Central), Calcutta, respondent No. 2. On receipt of the notices it has been alleged that the appellant through several letters made representations against initiation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant to disclose fully and truly all material facts necessary for the assessment and such due formation of belief justified the issue of the impugned notices. It has also been alleged that it was not incumbent on the officer concerned to divulge the materials at the preliminary stage and in fact the appellant would get ample opportunities to defend their case in the course of the assessment proceedings. The respondents, however, denied that there was no material on the basis of which the Income-tax Officer concerned could have reasons to believe that any income chargeable to tax had escaped assessment. It has been asserted that in fact the officer concerned had ample reasons to believe that large amount of income had escaped assessment for the several assessment years in dispute on account of the appellant's failure to furnish fully and truly material facts relating to and relevant to the assessments. The allegations of initiating fishing enquiries by the officer concerned were denied and it has been stated that the escapement of income for each of the years from 1950-51 to 1957-58 would be more than Rs. 50,000. The brief reasons for initiating the proceedings in the inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes by the auditors, Messrs. Lovelock Lewes, and pointed attention was drawn to the balance-sheet for the period ending on December 31, 1953, and to the said note therein and it was also contended that if the auditors' letter was looked into or the officer concerned had cared to read the relevant balance-sheet along with the letter then he would have seen that the appellant had truly and fully disclosed all material facts for assessment and that there was no omission on their part at all. It was also contended on behalf of the assessee that when the reason to believe has been challenged before a court it was for the respondents to satisfy the court about the sufficiency of the materials for the formation of the belief and mere production of the report would not be enough. Materials must be produced on the basis of which such reasons to believe were based. In fact it was contended before the learned trial judge that the reasons to believe as disclosed were non-existent because the assessee was not selling Ovaltine in India on consignment basis on behalf of M/s. A. Wander Ltd., and the more so when they were not also in charge of the Ovaltine propaganda departmerit. It was submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amani Venkata Narayana Sons v. First Additional Income-tax Officer, respectively, the learned judge discharged the rule. His Lordship, on consideration of the records was prima facie satisfied that the officer concerned had reasons to believe that income had escaped assessment. In the said proceedings, with the concurrence of the learned advocate for the assessee, the original balance-sheet for the year ending December 31, 1953, was looked into from the records which were produced by the revenue and on scrutiny it also transpired that the balance-sheet which was filed along with the affidavit-in-reply differed from the one which was filed before the Income-tax Officer. It appeared that the balance-sheet which was filed befere the officer concerned being certified to be a true copy by the secretary of the assessee-company did not contain the note of the auditors. In the appeal before us, after placing the reasons as set out hereinbefore, the reply of the appellant to the same and other documents as disclosed before the learned trial judge, it has been argued that the basis for the formation of the belief must be disclosed. It has also been argued that the alleged charge in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. It has further been held that a notice for reassessment can be issued under section 147(a) only if the following conditions are satisfied: (1) the Income-tax Officer issuing the notice must hold the belief that, due to the omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for the assessment, income in fact has escaped assessment; and (2) there must be materials or reasons for the aforesaid belief. Existence of the belief and existence of materials for the belief can both be challenged in proper proceedings and if the challenge is thrown, it is for the income-tax authorities to satisfy the court that the Income-tax Officer held the belief and that there were reasons to hold such belief. If there are reasons or materials, the sufficiency of such reasons or materials cannot be investigated by the court and production of books of account or other evidence would not absolve the assessee from the obligation to fully and truly disclose all material particulars relevant for the assessment. Whether there were materials before the Income-tax Officer or whether he formed the belief or not must be judged by the court either from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd other evidence which are produced in the course of assessment proceedings but the balance-sheet had to be filed along with the return by virtue of the provisions of rule 19 of the rules framed under the Indian Income-tax Act, 1922, and that makes the balance-sheet so filed part of the return itself it was further held in the facts of that case that even if the balance-sheet was viewed as no more than a statement of accounts or evidence, even then the note that had been appended to the balance-sheet concerning that particular entry which the auditors in the report had certified to be in accordance with the books of account by itself would be much more than the mere books of account and the disclosure of the state of things to the further knowledge of the assessee. Moreover, during the assessment proceedings as desired by the Income-tax Officer, a detailed list of the old machinery sold was produced. That detailed list, taken with what appeared in the balance-sheet both in the entry and in the note appended, were enough to show that the assessees had done their duty to disclose all material facts within their knowledge, and the officer had formed his opinion as to how to act on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 of the Act. Whether these grounds are adequate or not is not a matter for the court to investigate. In other words, the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. It has also been held that the expression "reason to believe" in section 34 does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith: it cannot be merely a pretence. It is open to the court to examine whether the reasons for the belief have a rational connection with or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions and the profits made from the sales are trading profits liable to tax, was a matter which it was the Income-tax Officer's task to decide and no duty lay on the company to admit that these transactions were by way of a trade. (iii) The Income-tax Officer who issued the notices under 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. It was also held that: (1) to confer jurisdiction under section 34 to issue notice in respect of assessments beyond the period of four years, but within the period of eight years, from the end of the relevant year, two conditions had to be satisfied. The first was that the Income-tax Officer must have reason to believe that the income, profits or gains chargeable to income-tax had been under-assessed. The second was that he must also have reason to believe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere had been any non-disclosure as regards any primary 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 were adequate or not for arriving at the conclusion that there was a non-disclosure of material facts, was not open for the court's investigation. In other words, all that was necessary to give this special jurisdiction was 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. It was the duty of the assessee, inviting 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; and (4) the question whether the Income-tax Officer had reason to believe that under-assessment had occurred by reason of non-disclosure of material facts was not a mere question of limitation only but was a question of jurisdiction which could be investigated by the High Court in an application under article 226 of the Const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment proceedings for the said 5 years. Such view was taken as there was nothing to indicate that in any particular year, out of the years 1950-51 to 1954-55, income in excess of Rs. 50,000 had escaped assessment. In view of the above the court quashed the reassessment notices and the consequent assessments which were made. In support of his submissions that "materials must be there", Dr. Pal relied on the case of Manik Chand Nahata v. Income-tax, Officer, wherein it has been observed that the expression "likely to amount to" a lakh of rupees or more in section 34 of the Act of 1922 means that the Income-tax Officer must form some kind of belief or even a suspicion that the amount of escaped income for the year may amount to rupees one lakh or more in the aggregate before the notice under section 34 is issued. Where there is material in the records of the case to establish that the amount of escaped income amounted to rupees one lakh or more, the Income-tax Officer would have no right to reopen the proceedings under the old Act beyond the expiry of eight years from the relevant assessment year. It has thus been observed that the Income-tax Officer cannot is sue a notice under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer had jurisdiction to decide the question whether the firm was non-resident and either way there was material before him on that question and it could not be said the officer assumed jurisdiction by a wrong decision on that question, and dismissed the writ petition. On appeal, the Supreme Court held reversing the decision of the Division Bench, that the Income-tax Officer was not the sole judge of the fact whether the firm was resident or non-resident, since that was a jurisdictional fact. If the High Court came to the conclusion, as the learned single judge had done in this case, that the Income-tax Officer had clutched at the jurisdiction by deciding the jurisdictional fact erroneously, then the appellant was entitled to a writ of certiorari. It was further held that the provisions of section 30(1A) which required that a person seeking to file an appeal thereunder must have first deducted tax at source and paid the tax deducted to the Government, could not apply to the case of a person contending that the person to whom he made the payment was not a non-resident. No authority, much less a quasi-judicial authority, can confer jurisdiction on itself by deciding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em on reassessment but added a different sum of Rs. 13,300 being the total of cash credits standing in the assessee's books to the credit of a member of the assessee's family treating these credits as income of the assessee from undisclosed sources. It was held that as the belief of the assessee that income had escaped assessment was based on the fact that the assessee had failed to disclose a particular entry and the nature of the entry was such that its disclosure could have had no bearing on the amount to be assessed, the belief of the Income-tax Officer that income had escaped was based on no material and the proceedings under section 34 in which the reassessment including the sum of Rs. 13,300 was made were invalid. In support of his argument on the question of the formation of the belief, Dr. Pal also relied on the case of Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax. In that case, in 1944, the assessee, who was a shareholder of a number of companies and also the director and managing director of various companies, sold his shareholding in the Associated Hotels for Rs. 20,65,705. Similarly, in 1949, he sold his holdings in another hotel. He disclosed to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence, but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though declaration or sufficiency of the resons to believe cannot be investigated by the court. Lastly, Dr. Pal relied on the Full Bench decision in this court in the case of Lakhmani Mewal Das v. Income-tax Officer. In that case, in the income-tax assessment for the assessment year 1958-59 made on June 14, 1960, the petitioner-assessce's claim for deduction of Rs. 10,494-4-3 said to have been paid as interest to certain creditors was allowed. On March 14, 1967, the assessee received a notice dated March 8, 1967, issued under section 148 by the Income-tax Officer, calling upon him to submit a return for the aforesaid assessment year as the Income-tax Officer had reason to believe that the income of the petitioner had escaped assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason to believe that the documents produced in support of the transaction are spurious and the creditors are merely name-lenders, assessment can be reopened. It has also been held that where notice under section 148 is issued without proper satisfaction of the Commissioner on the reasons recorded by the Income-tax Officer, though not made out specifically in the petition, can be allowed to be raised at the time of hearing. This serious defect in the proceedings cannot be ignored on the technical ground of not including it in the petition. It has also been held that before a notice to reopen the assessment is issued, the Income-tax Officer must apply his mind to the facts of the case and must state that by reason of information mentioned in the report he has come to the conclusion that certain income has escaped assessment. The Commissioner must also record his satisfaction that the case is fit for reassessment. The notice issued without application of mind and with the substitution of the form for substance is without jurisdiction. Dr. Pal also relied on the case of State of Madhya Pradesh v. Sardar D. K. Yadav for the proposition that where the jurisdiction of an administrative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om proceeding in pursuance of a notice of reassessment issued under section 34 of the Indian Income-tax Act, 1922, for the assessment years 1940-41 to 1951-52 and it appeared from the affidavit of the officer concerned that considerable increase since 1938 in the investments in the money-lending transactions of the assessee and in its wealth had been discovered, the increase in wealth being wholly disproportionate to the known source of income of the assessee and no attempt was made by the assessee to furnish some reasonable proof of source of the additional wealth. In that case it has been held that it is not necessary or imperative that a notice under section 34(1) must specify under which of the clauses, clause (a) or (b), it is issued. The main notice to be issued in a case under section 34 is the notice under section 22(2) and section 34 merely authorises the issue of such a notice. It has also been held that the assessee does not discharge his duty to disclose fully and truly material facts necessary for assessment of the relevant year by merely producing the books of account or other evidence. He has to bring to the notice of the Income-tax Officer particular items in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer these determinations will not hold good now. It may be mentioned that although the determination in the latter case was made on October 27, but there was no reference in the judgment to the former case. Relying on the former case Mr. Pal submitted that even on the basis of the same, the existence of a primary fact will be an objective fact which the court can investigate, but once that fact is found to exist, and the Income-tax Officer reasonably believes that there was non-disclosure and that such non-disclosure resulted in non-assessment, under-assessment, etc., the court cannot investigate into the adequacy or otherwise of his reasons to come to that belief and the initiation of a proceeding for reopening and reassessment in such a case would be valid. Mr. Pal next relied on the Full Bench decision of the Gujarat High Court in the case of Poonjabhai Vanmalidas and Sons v. Commissioner Income-tax for the purpose of establishing that the determinations made in the case of Kanji Ranchhod v. Commissioner of Income-tax is also no longer good law and the same has specifically been overruled in and disapproved by the said Full Bench decision. In the said Full Bench case, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of Ahmedabad, the Income-tax Officer of S, who had jurisdiction over Wadhwan town, recorded the statement of N to the effect that N had given a loan of Rs. 2,00,000 which had been repaid in the middle of S.Y. 2002, and that the loan had been given from his personal fund and not from N and Co. In view of this statement which was materially different from the materials furnished by the assessee at the time of the assessment, the Income-tax Officer served a notice on the assessee on March 30, 1954, under section 34(1)(a) of the Act. The assessee filed a return under protest. The statements of N and his brother-in-law, K, were recorded on commission in the absence of the assessee. The karta of the assessee-family was also examined. The Income-tax Officer then made a reassessment order on March 19, 1955, taxing the sum of Rs. 3,05,000 as income from undisclosed sources. Ultimately, the Appellate Tribunal held that the quantum of undisclosed income in the year of account was Rs. 1,78,000 and the appeal was partly allowed. On a reference it was held that the issue of the notice under section 34(1)(a) was not justified. The Income-tax Officer himself, when he made the original assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income, profits or gains chargeable to income-tax has been under-assessed and has also reasons to believe that the same has happened by reason of either omission or failure on the part of the assessee to make a return of his income or there has been a failure or omission on his part to disclose fully and truly all the material facts necessary for the assessment, he would have jurisdiction to issue the notice under section 147. Both the conditions mentioned hereinbefore are conditions precedent to conferment of jurisdiction or to acquire the same by the Income-tax Officer. It is clear that if there are some reasonable grounds for the Income-tax Officer to form the belief that there has been any non-disclosure as regards any fact which might have a material bearing on the question or touching the validity or affecting the quantum of assessment, that would be sufficient to give jurisdiction to him to issue notice under section 147. It is also clear that whether these grounds are adequate or not is not a matter for the court to investigate and the sufficiency of the grounds which induced the Income-tax Officer to act in the matter of initiation of proceedings is not justiciable. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and evidence as disclosed. Such duty, however, will not extend beyond the full and truthful disclosure of all primary facts and, once such facts are before the assessing authority, it is for him to decide what inferences of facts can be reasonably drawn and what legal inferences will ultimately have to be drawn. It is not for anybody else, far less for the assessee, to inform the assessing authority what inferences, whether of facts or law, should be drawn. If there are in fact some reasonable grounds for the officer concerned to believe that there has been any non-disclosure or omission as regards any primary fact, which could have a material bearing on the question of under-assessment, that would be sufficient to confer jurisdiction on the said officer to issue notices under section 147. It is of course not open to the court to investigate whether the grounds are adequate or not for arriving at the conclusion that there has been non-disclosure of material facts. All that is required for exercising special jurisdiction under the section is that when the Income-tax Officer assumes jurisdiction he must have some prima facie grounds for thinking that there has been some non-disclos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s correct. But in a proceeding under article 226 of the Constitution of India challenging the jurisdiction of the Income-tax Officer, as has been found in the case of Kantamani Venkata Narayana and Sons v. First Additional Income-tax Officer, to issue a notice under section 34(1)(a) of the Act of 1922, the High Court is only concerned to decide if the conditions which invested the officer with powers to reopen the assessment, did exist or not. As has been held in that case it will not be within the province of the High Court to record a final decision about the failure to disclose fully and truly all material facts bearing on the assessment and consequent escapement of income from assessment and tax. The determination in the case of State of Madhya Pradesh v. Sardar D. K. Yadav, as has been rightly submitted by Mr. Pal, is distinguishable on the facts of the present case. In a proceeding under article 226 of the Constitution of India challenging the jurisdiction of the Income-tax Officer to issue a notice under section 34(1)(a) of the Act of 1922, which is corresponding to section 147 of Act of 1961, the High Court is only concerned to decide whether the conditions which invested t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation of belief, cannot be made available to the assessee at this stage. Mr. Pal, of course, made it also clear that he has no objection to produce the said report for the perusal of the court for the purpose of assessing whether there is some material or any justification for the initiation of the proceedings. Claims and counter-claims were made at the Bar on the question of this court's power to look into those records and ultimately Dr. Pal, with his usual fairness, agreed that the court can, for an effective determination of the dispute, look into the said records to find out whether there is any material on record for enabling the Income-tax Officer to form the opinion or belief that there has been no true and faithful disclosure by the assessee as a result whereof there has been concealment and consequent under-assessment. Dr. Pal also agreed that this court, in these proceedings, should not look into or go into the sufficiency of evidence but if it is found that there is some evidence relevant to the issue, then the court cannot interfere. In view of the above submissions, Mr. Pal handed over to us the original report of the Central Bureau of Investigation. We have looke ..... X X X X Extracts X X X X X X X X Extracts X X X X
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