TMI Blog1966 (1) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... the debt. On December 14, 1940, the mortgagee instituted a suit to enforce the mortgage and recover ₹ 5,50,573, made up of the principal sum of ₹ 2,76,000 and interest of ₹ 2,88,193, less the sum of ₹ 13,620 paid by the mortgagor. In September, 1943, the suit was compromised and on October 5, 1943, a decree was passed in terms of the compromise according to which the mortgagee was to receive ₹ 3,50,500, on or before October 1, 1944, in full satisfaction of his claim with interest at 3 per cent. per annum on amounts remaining unpaid. The debt under the compromise decree was discharged by payment partly in cash and partly by sale of the hypotheca to third parties with directions to the purchasers to pay the proceeds to the decreeholder. Some time before October, 1945, Pattayagar died and his eldest son paid ₹ 78,405 on October 18, 1945, which was the sum still outstanding, and discharged the entire debt. For the assessment year 1944-45 Chidambaram Chettiar, as the karta of his Hindu undivided family, was assessed under section 23(3) on February 12, 1946, on a total income of ₹ 78,556 which, on appeal, was reduced to ₹ 53,153. Before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the compromise decree. According to these entries, the claim in the mortgage suit was settled between the parties at ₹ 5,00,500 of which ₹ 1,50,000 was to be paid in cash before the next hearing of the suit and for the balance a compromise decree should be passed. A further detail found in the entries was that a sum of ₹ 34,840, which the Pattayagar, as receiver appointed in the suit, had deposited into court, might be drawn out by the decree-holder towards partial payment of ₹ 3,50,500. With reference to these entries and details, the Income- tax Officer concluded that the suit claim at the time of the compromise being about ₹ 6,50,000 and as the compromise decree covered a sum of ₹ 3,50,500, the assessee and the Pattayagar must have secretly agreed between themselves that the former should give up ₹ 1,50,000 and the latter should pay the remaining ₹ 1,50,000 to the assessee in cash. On that view, he found that the assessee failed to disclose receipt of ₹ 1,50,000 and brought it to tax. There was an appeal against his order which was allowed on a short point, namely: On perusing the Income-tax Officer's grounds and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no fresh information subsequent to February 12, 1946. We are not satisfied that there is substance in any of these submissions. Assuming--it is not necessary to decide on the view we take that a factual finding or determination by the assessing authority in relation to any question as to the receipt of income or as to whether it can be taken into account in any particular year cannot be reopened by the same authority under section 34(1), it is not possible to accept the contention for the assessee that there was any such determination in this case by the first Income-tax Officer. He had no doubt information that the assessee was in receipt of ₹ 1,50,000 in the accounting year but as he himself stated in his order-sheet, there were not enough materials before him to establish the fact of receipt and further that it had escaped assessment. When he made it clear that in order to come to a conclusion it was necessary to get further materials both from the Income-tax Officer at Erode and the Pattayagar as well as other sources, hardly would it be justifiable to impute to him a determination that the receipt was a fact and that it should be considered only in the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld have reason to believe that, as a result of omission or failure on the part of the assessee, income has escaped assessment in a particular year. Such a belief, as we think, could not of course be entertained by the Income-tax Officer if he had no reason to think that escapement was by reason of omission or failure on the part of the assessee. It is urged, therefore, that the under-assessment, if any, was not due to any failure of the assessee to give all facts or any omission on his part to disclose material particulars and that, so far as he is concerned, he is still denying the receipt. If the Income-tax Officer had information, as it was alleged, that the assessee had received the sum, it was his duty, as the argument proceeds, to have it investigated. Learned counsel for the assessee asked how could the revenue say that there was failure on the part of the assessee to disclose, when it had already been in possession of information as to the receipt and its escapement from assessment. He argues, therefore, that failure or omission on the part of the assessee did not result in under-assessment. Learned counsel, as we said, is right in his legal submission as to the requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment and postponed investigation and gathering of materials. If the primary fact was before the assessing authority, it could not then be said, according to learned counsel for the assessee, that there was any omission or failure on the part of the assessee to disclose that fact; so the escapement, if any, could not truly be said to be the consequence of any omission or failure of the assessee to disclose. A part of the argument is not without some force. The first Income-tax Officer did have the information before he completed the assessment for 1944-45 that the assessee had received a large sum in the accounting year which he had not shown in his return, and it was his duty to have further investigated into it so that he might be able to come to a definite conclusion on it before completing the assessment. It, however, appears that he did not proceed with the investigation then and there because he was of opinion that, in any case, the receipt, if true, would be relevant for consideration only in the following year of assessment. In the circumstances, can it be said that there was failure or omission on the part of the assessee to disclose? There can be only one answer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The argument for the assessee goes so far as to suggest that in the circumstances neither clause (a) nor clause (b) of section 34(1) would be applicable. The revenue in this case has not relied on clause (b); and, in fact, the first and second orders under section 34 proceeded on the basis that there was omission or failure on the part of the assessee to make full and true disclosure of all material facts. In our opinion, the revenue was, in the circumstances, justified in doing so. It is not necessary to reiterate that in the original assessment proceedings and before and after the proceedings under section 34, the assessee persisted in his denial of the receipt, and the insufficient material in the form of a communication from the Income-tax Officer, Erode, to the assessing officer did not establish the fact of omission or failure on the part of the assessee to make a true disclosure. It was only when, after the original assessment, the copy of the relevant entries of the accounts of the Pattayagar, the statement and evidence of his agent were recorded that the revenue could possibly find on the question of omission or failure of the assessee. As already mentioned and as poin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the application of these two sections is subject to the limitations prescribed by them; and so the fact that the said sections confer powers for revision or rectification would not be relevant and material in construing section 34(1)(b)....We would accordingly hold that the word 'information' in section 34(1)(b) includes information as to the true and correct state of the law and so would cover information as to relevant judicial decisions. On that view, it was held that the decision of the Supreme Court there in question should be treated as information within section 34(1)(b). In the course of its judgment, the Supreme Court adverted to the position that under the Explanation to section 34 the fact that with due deligence material facts could have been discovered by the Income- tax Officer from the account books or other evidence produced by the assessee before him would not constitute disclosure. Learned counsel for the assessee contended, on the strength of Ananthalakshmi Ammal v. Commissioner of Income-tax [1955] 28 I.T.R. 178, that a change of opinion of the Income-tax Officer on a factual matter did not amount to definite information within the meaning of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk there is very little substance in the second question for our consideration. The contention of the assessee is that, having regard to the terms in which the Appellate Assistant Commissioner set aside the first order of the Income-tax Officer under section 34, the second order under that provision, inasmuch as no fresh notice was given under section 34, is invalid and without jurisdiction. The Appellate Assistant Commissioner in setting aside the order said: I therefore set aside the order to enable the Income-tax Officer to re-do the same according to law after giving an opportunity to the appellant to place all his cards before the department... Re-do , according to the assessee, means re-do from the inception , that is to say, it amounts to a direction to the Income-tax Officer to start afresh by serving notice again under section 34. Learned counsel for the assessee also urges that when the first order of the Income-tax Officer under section 34 was set aside with a direction to re-do, and re-do according to law, that again means the Income-tax Officer must re-do with a fresh notice under that section. In support of the contention, reference is made to K.S. Firm v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cash basis of accounting, the former applied to transactions as between members of the community and the latter to those parties outside the community. Where part payments were made by such third parties, the practice appears to be for the Nattukottai Chetty community, under the Chetty system of accounting, to credit them towards principal and the balance, if any, towards interest. In his second order, the Income-tax Officer, however, stated that normally, in the Chetty system of accounting, interest credited is always debited to the account and vaddi chittais are issued and as such, the assessment of ₹ 1,50,000 in the year of account was in order. The Appellate Assistant Commissioner dealt with the receipt of the sum as an open payment from the debtor and treated it as income of the accounting year on the view that, in a case, where neither the debtor nor the creditor makes any appropriation of the payment as between principal and interest, the department was entitled to treat the payment as applicable to the outstanding interest and assess it as income. The Tribunal noticed the assessee's contention that, according to the Chetty system, when money was received from a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income, profits and gains can be determined has to be decided and if there is no express decision, the question must be deemed to have been decided. In that sense, the non-exercise of the power under section 13 must be taken to imply a decision as to the method of accounting adopted by the assessee whose assessment has been completed. But the third question under reference, in the circumstances of this case, ought, in our opinion, to be decided more with reference to the correct principle applicable to appropriations of an open payment. In deciding this question, the circumstance that the receipt of the sum of ₹ 1,50,000 had not been brought into the accounts of the assessee could make no difference to the fact that when it is established and there is nothing to show that it had been appropriated either towards principal or interest, the payment should be regarded as an open payment. If it was a matter between a creditor and his debtor, in the absence of the debtor exercising preference, it may be presumed that the creditor has appropriated it towards outstanding interest and then only to the principal. But this rule of appropriation has, in our view, no application wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 973 should be treated as money's worth and that, as this sum far exceeded the total amount of interest due, it must be treated as applicable in the first place to the discharge of the debtor's liability for interest. In support of this argument, reliance was placed on the presumption that the creditor is presumed to apply payments received from the debtor towards extinction of the claims towards interest before capital claims. The Board rejected the argument on two grounds, one of which is that contained in the observations above extracted by us from the judgment of the Board. The other ground was this: Here there was an arrangement affecting the whole indebtedness whereby certain assets were accepted in part satisfaction and promissory notes were taken for the balance. The basis of the presumption, namely, that it is to the creditor's advantage to attribute payments to interest in the first place, leaving the interest bearing capital outstanding, is gone. Counsel for the assessee before us relied on the second ground as well and contended that the sum of ₹ 1,50,000 must be taken to have been received as part payment towards the settlement which eventual ..... X X X X Extracts X X X X X X X X Extracts X X X X
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