TMI Blog1969 (8) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... 1945,46, he filed a return of income on July 19, 1945, consisting of salary of Rs. 3,737 and showing loss from business of Rs. 2,831. On March 26, 1946, however, he filed returns for the earlier assessment years 1941-42 to 1944-45 and a revised return for the assessment year 1945-46, adding varying amounts as income by way of interest accrued outside the Indian Union. The assessments of these years were completed on the following dates ; for the assessment years 1943-44, 1944-45 and 1945-46 on March 27, 1946, for 1942-43 on March 30, 1946, and for 1946-47 on January 12, 1947. These assessments included the different amounts of income by way of interest accrued outside the Indian Union, as shown by the assessee. For the next year, viz 1947-48, the assessment was made on March 28, 1949, and the assessment order was signed by the Income-tax Officer on March 31, 1949. The accounting year for this assessment was the Diwali year which ended on October 21, 1946. Along with this return, various statements were also filed by the assessee of which one was a copy of the assessee's capital account which showed a credit entry of Rs. 3,06,000 received by way of draft on the Imperial Bank of Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rior approval of the Commissioner of Income-tax with notice dated March 26, 1956, which was served on the assessee on March 28, 1956. In the assessment that was finally made in pursuance of the above notice on February 28, 1957, the Income-tax Officer included Rs. 3,06,000 (in the place of Rs. 70,557 originally assessed), as income under other sources " Income outside British India " remitted into British India, and Rs. 25,000 as income not disclosed. That sum of Rs. 25,000 represented a cash credit in the name of one Bishundas Ramgopal, which the Income-tax Officer discovered during the assessment proceedings in the accounts of the assessee and which according to him was a fictitious borrowal. Aggrieved by this, the assessee appealed to the Appellate Assistant Commissioner, before whom he raised several grounds dealing with the validity of the action under section 34(1)(a) and also with the merits of the assessment under which the two items of Rs. 3,06,000 and Rs. 25,000 had been added as income. The appellate authority found no substance in the appeal and confirmed the assessment. The assessee then carried the matter in second appeal to the Income-tax Appellate Tribunal, Hydera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nos. 2 and 3 need not be answered. In fact, question No. 2, itself, is specifically couched in a manner that it is unnecessary to answer it, if the answer to the first question is in the affirmative. The third question also is in the same position. Both the learned counsel for the assessee as well as the revenue also agreed that questions Nos. 2 and 3 need be answered only in the event of the first question being answered in the negative and that they need not be dealt with in case the answer to the first question is in the affinitive. In order to answer the first question, it is necessary to read the relevant provisions of section 34. 34. (1) If - (a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assesse to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsively. Though many a decision was cited at the bar by both sides, it is sufficient here to refer to some of the salient cases. In Calcutta Discount Co. v. Income-tax Officer profits realised by the appellant-company by sales of shares were not assessed to tax during three assessment years 1942-43 to 1944-45. The Income-tax Officer proposed to initiate reassessment proceedings under section 34. The company submitted the returns, but at the same time applied to the High Court under article 226 of the Constitution for directing the officer not to proceed with reassessment proceedings. It contended that the officer did not have reason to believe that under-assessment had occurred by reason of the omission or failure on the part of the company to disclose fully and truly all material facts necessary for assessment. In reply, the officer filed an affidavit stating the grounds on which he came to the belief that by reason of the omission or failure of the company to disclose fully and truly all material facts necessary for the assessment, its income had been under-assessed. Though a single judge of the High Court granted the writ sought by the assessee, it was refused in appeal by a Div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erned, it was the assessee's duty to disclose all of them including particular entries in account books, particular portions of documents, and documents and other evidence which could have been discovered by the assessing authority, from the documents and other evidence disclosed. The duty, however, did not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts were before the assessing authority, it was for him to decide what inferences of facts could be reasonably drawn and what legal inferences had ultimately to be drawn. It was not for anybody else--far less the assessee-to tell the assessing authority what inferences, whether of facts or law, should be drawn. Discussing the scope of the jurisdiction of the Income-tax Officer to start the proceedings under section 34(1), the majority of the judges observed : " If there were in fact some reasonable grounds for the Income-tax Officer to believe that there has been any non-disclosure as regards any primary fact, which could have a material bearing on the question of underassessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notices under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer from whom nothing had been hidden and to whom everything has been fully disclosed, then the assessee cannot be subjected to section 34, merely because the Income-tax Officer miscarried in his interpretation of evidence. But, it is otherwise if a contention which is contrary to fact is raised and the Income-tax Officer is set to discover the hidden truth for himself. In the latter case, there is suppression of material facts, or, in other words, that lack of full and true disclosure which would entitle action under section 34 of the Act. Thus, we find that in enunciating the basic principles in accordance with which an Income-tax Officer can invoke his jurisdiction under section 34 all the judges including the majority and the minority are agreed. The difference was only in regard to emphasis and amplification and, ultimately, in the application of the principles to the facts of the case. In S. Narayanappa v. Commissioner of Income-tax the Supreme Court restated the same principles. It held that two conditions must be satisfied to confer jurisdiction on the Income-tax Officer to issue the notice under section 34(1)(a), viz., (1) that the Income-tax Officer must have rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is obliged only to disclose the primary facts upon which the assessment may be founded and it may not be necessary for him to indicate the inferences to be drawn from such material, held that the assessee before them failed to disclose the real relationship between herself and the person from whom certain amounts of money had come to her and by failing to do so had omitted to disclose material facts necessary for her assessment. The Madras High Court considered the nature of the disclosure of all material facts by the assessee to the assessing officer in E. M. Muthappa Chettiar v. Commissioner of Income-tax. At page 650, the court observed : " It is the duty of the assessee to reveal the major facts which have a bearing on the assessment to be made...............He cannot delve into the mind of the Income-tax Officer and try to fathom it and predicate what are material facts in the view of the officer. The facts must be such that if taken into account, they would have an adverse effect on the assessee by the passing of a greater assessment than the one actually made. The rule of full and true disclosure of material and necessary facts should not be so fastidiously construe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no material at all on which the Income-tax Officer could found such belief, that is, have reason for such belief. If, therefore, an assessee is in a position to show that he had disclosed at the time of the original assessment all that he was bound to disclose, i.e., all the primary facts relevant to and having a bearing on his assessment, there would be no ground for the Income-tax Officer to have reason to believe that there was any omission or failure on the assessee's part to disclose. Similarly, if an assessee can show that, though there was omission or failure to disclose on his part, such failure or omission had not resulted in any non-assessment or under-assessment, etc., surely there would be no ground for the Income-tax Officer to have reason to believe that there was any non ment or under-assessment, etc., consequent upon such omission or failure. It would, therefore, follow that primary facts necessary for a proper set are objective facts, the existence or the non-existence of which is not a matter of reasonable belief on the part an Income-tax Officer. An Income-tax Officer cannot say that he had reason to believe that a certain fact which was relevant for assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid to be to material facts " within the meaning of section 34(1)(a) ; but what primary facts satisfy this requirement must necessarily depend upon the facts of each case. A review of the above rulings yields the following principles according to which alone reassessment under section 34(1)(a) can be validly made : (i) the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment, (ii) he must have also reason to believe that such escapement has taken place by reason of either, (a) omission or failure on the part of an assessee to make a return of his income under section 22, or (b) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. These conditions are conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice under section 34(1)(a). (2) The " material facts " which an assessee is required to disclose at the time of his assessment are primary facts material and necessary for the purpose of his assessment. The " primary facts " which are required to be disclosed must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " The Tribunal accepted the contention on behalf of the assessee that there was merely a change of opinion on the part of the successor Income-tax Officer and that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. The Tribunal also declined to accept the arguments on behalf of the department that the Income-tax Officer who made the original assessment had not applied his mind in regard to the whole sum of Rs. 3,06,000 but only to a part of it, which had been disclosed, viz., Rs. 57,040. " The reasoning of the Tribunal coming to the aforesaid conclusion is that the Income-tax, had before him the fact of the remittance of Rs. 3,06,000 by the assessee in April, 1946, under the draft received by him from the bank in Jaipur. Part of this amount had already been declared by the as income thereby necessarily implying that the balance was claimed by him to be the capital amount. Obviously, the Income-tax Officer, who made the original assessment, had accepted this claim of the assessee but he did not do so blindly. Obviously, he applied his mind and tested the correctness of the various items of income, becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the revenue that he had another business outside the territory of British India which brought him these items of income. In response to a notice under section 22(2) for the assessment year 1947-48, the assessee filed a return of his income showing a total income of Rs. 63,633 which included a sum of Rs. 57,039-9-6 shown under section (B) as income which accrued outside the taxable territories but brought into the taxable territories. The agreed statement of the case proceeds to state that, " along with the return of income, various statements were also filed of which one was a copy of the assessee's capital account, which showed the following entry on the credit side : April 30. 1966. Draft received from Jaipur Bank Rs. 3,06,000-0-0. When this was stated, it can be unhesitatingly understood that the Tribunal was not only informed that these various statements were filedalong with the return, but also that it looked into them because it quoted the credit entry of Rs. 3,06,000 from one of such statements. The department placed before us the file relating to the original assessment. A statement at page 12 of that file showed the total income from outside British India at Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal not only had these statements before it when it considered the case, but also considered them and treated them as part of the material on which it came to its conclusions. The original assessment was on a total income of Rs. 79,351 made up as under : Salary .. Rs.2,200 Business .. 6,576 Other sources .. 18 Foreign income brought to Indian Union .. 70,557 ---------- 79,351 ----------- As has been already stated, the Income-tax Officer on the first occasion did not accept the sum of Rs. 57,040 as foreign income, but added Rs. 14,168 to it. The notice under section 34(1)(a) was served on the assessee on March 28, 1956, and according to the reassessment which was completed on February 28, 1957, the total income was estimated at Rs. 3,39,794 which was made up as under : Salary ... Rs.2,200 Business ... 31,576 (a) Income outside British India remitted into British India ... 3,06,000 (b) Interest ... 18 --------------- 3,09,794 --------------- It will be men that under the head " business " a sum of Rs 25,000 was added and under the head " income outside British India " the entire sum of Rs. 3,06,000 was added in the place of Rs. 70,557. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved was satisfactorily explained or not, he estimated the accrued income at Rs. 1,14,000 after deducting the sum of Rs. 2,25,000 he had advanced to four persons in Ratnaghar. Since only Rs. 1,03,557 was assessed the officer thought that there was at least an unaccounted unassessed balance of Rs. 10,443. While doing this the officer completely ignored the balance of rupees nineteen thousand and odd in the hands of the assessee out of his original assets (according to his claim) after deducting Rs. 2,25,000. The officer thus committed errors apparent on the record while proceeding under section 34(1)(a). Apart from these obvious errors committed by the Income-tax Officer the crucial question is whether at the time of the original assessment the assessee had failed to disclose fully and truly all material facts necessary for his assessment and for that reason a part of his income had escaped assessment. We find from the order of the Income-tax Officer dated February 28, 1957, which is annexure " B " to the statement and which is stated to be part of it, the assessee filed on March 26, 1946, returns for the assessment years from 1941-42 to 1944-45 and a revised return for the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those years are added up an income of Rs. 71,208 would be left unassessed, after excluding a sum of Rs. 33,000 assessed earlier. This 71,208 was arrived at as the total income of the assessee from outside the Indian Union. This could have been arrived at by the Income-tax Officer, on the previous occasion only on the basis that a certain amount of capital was available to the assessee from out of which he could derive this income. Indeed, the assessee's capital account filed along with the return for the year 1947-48 showed the receipt of Rs. 3,06,000. Thus, we find, the assessee placed before the assessing authority even on the first occasion the basic facts necessary for his assessment. He showed a receipt of Rs. 3,06,000 in his capital account. The receipt of this amount could not have been ignored or brushed aside by the assessing authority for the simple reason that amounts of interest accrued over the previous years were all clearly indicated. They were clearly indicated not only in the return for the assessment year 1947-48 but were also shown in the previous returns and were in fact assessed in part. When a particular capital receipt is shown along with the amounts of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have said, the assessee had disclosed on the first occasion that he had received capital and also income thereon. There is no reason to suppose that the Income-tax Officer did not seek and receive an explanation from the assessee about the source of his capital on the earlier occasion. He obviously received one, accepted that explanation and made the assessment on that basis. It is not for the assessee to suggest the inferences that could be drawn from the primary facts, material for his assessment, placed by him before the assessing authority, His only duty is to place before the concerned authority the material facts necessary for a proper assessment. This, the present assessee did even on the first occasion. If the reassessing authority wants to draw a different inference from the one which had been drawn by the original assessing authority, he cannot, on that basis, and for that reason, reopen assessment under section 34(1)(a). That provision of law does not clothe him with that jurisdiction. He can do so only if he has reason to believe that material facts necessary for the assessment had not been disclosed fully and truly at the time of original assessment. The assessing auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax officer on the ground that the borrowers belonged to the same caste as the assessee and also on the ground that Ratnaghar was a small place and that the borrowers were not substantial people requiring large amounts of loans for their business. These different criticisms levelled by the Income-tax Officer on the explanation made by the assessee at the time of reassessment are referred to by us for the purpose of pointing out that the entire basis for the reopening of the assessment under section 34(1)(a) is surmise and suspicion and consequential change of opinion and nothing but that. As we have said, jurisdiction under section 34(1)(a) cannot be clutched at by the Income-tax Officer on mere surmises and suspicions. When the assessment was first made, the income of Rs. 70,557 from outside British India was accepted and added on a definite basis which must necessarily refer to the existence of certain capital. The existence of such capital was thus already accepted in the earlier assessments. So, the source of that capital was not a material fact for the assessment of the year 1947-48. We have, thus, no hesitation in coming to the conclusion that the Income-tax Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the record have all been narrated in the statement of the case, even if the Tribunal has failed to consider some of the aspects, though raised before it, but rested its decision only on one or two aspects, the High Court cannot call for a further statement of the case but must decide all the aspects on the evidence already on record and appearing in the statement of the case (vide Abdul Hameed Khan v. Commissioner of Incometax). In the circumstances, we do not find it proper or necessary to interfere with the findings recorded by the lower court or to call for a supplementary statement. The law in regard to the interference by the High Court with the findings of the Tribunal was stated by the Supreme Court in G. Venkataswami Naidu Co. v. Commissioner of Income-tax thus : " Where the point sought to be raised on a reference is a pure question of fact, the finding of fact recorded by the Tribunal must be regarded as conclusive in proceedings under section 66(1). If, however, such a finding of fact is based on an inference drawn from primary evidentiary facts proved in the case, its correctness or validity is open to challenge in reference proceedings within narrow limits. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovo assessment. It was held by this court in Pulavarthi Viswanatham v. Commissioner of Income-tax that : " Once an assessment is validly reopened under section 34(1)(a), the Income-tax Officer proceeds de novo and issues a notice under section 22, and the assessee is upon service of that notice under an obligation to disclose his total income, and it is not open to him to omit any part of his income ; if he does so he does it at the peril of attracting section 23(4). It is not open to him to contend that it is only such portion of the income which was not included in the original return that would be liable to assessment in the reassessment proceedings. Therefore, after notice issued under section 34(1)(a), the power of the Income-tax Officer to assess is not limited to items which escaped assessment by reason of the failure on the part of the assessee to disclose all his income, profits or gains which are subject to tax but extends to taxing amounts which were excluded by the Income-tax Officer in the original assessment even though the assessee had himself shown those amounts in his return of income. " To the same effect are the decisions in Anne Nagendram and Bommareddi Ven ..... X X X X Extracts X X X X X X X X Extracts X X X X
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