TMI Blog1973 (7) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... nt during the relevant assessment year - - - - - Dated:- 4-7-1973 - Judge(s) : TULZAPURKAR., KANTAWALA. JUDGMENT The judgment of the court was delivered by KANTAWALA C.J.-The question involved in this petition is whether the Income-tax Officer (the respondent) had jurisdiction to initiate proceedings for reopening the assessment of the petitioner for the assessment year 1950-51, under section 147(a) of the Income-tax Act, 1961 (hereinafter referred as "the Act"), and whether such initiation of proceedings is justified having regard to the conditions precedent to be fulfilled before the provisions of the said section can be attracted. The petitioner was an employee of the Dalmia Cement and Paper Marketing Co. Ltd. (hereinafter referred to as "the company"). It was his case before the authority who assessed him for income-tax for the assessment year 1950-51, that by a letter, dated October 11, 1943, he was appointed to look after the Bombay office organisation of the company at a remuneration of Rs. 4,000 per month, free of tax and with other benefits and perquisites as therein provided. It was one of the terms of the agreement as per the document filed before the taxing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udicial Member of the Tribunal in their separate orders practically came to the same conclusion. An application by the revenue to the Tribunal to refer the case to the High Court was dismissed and a further application to the High Court for directing the Tribunal to refer the case to it for disposal was also dismissed. Thereupon, the revenue preferred a petition for special leave to appeal to the Supreme Court both against the order of the Tribunal as well as against the order of the High Court. The Supreme Court granted special leave to appeal against the order of the High Court and against the appellate order of the Tribunal subject to the condition that in the appeal against the order of the Tribunal no question of fact shall be allowed to be raised. While disposing of this petition for leave to appeal to the Supreme Court, the court directed the Tribunal to refer the following question to the High Court for determination, namely: " Whether, on the facts and in the circumstances of the case, the sum of Rs. 7 lakhs is liable to tax under section 7 of the Indian Income-tax Act ?" The income-tax reference was heard by the High Court and decided in favour of the assessee. The ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . That letter was replied to by the petitioner on January 25, 1966, and the attention of the Income-tax Officer was also drawn to an earlier letter dated November 20, 1964, addressed to him by the chartered accountants of the petitioner in relation to the said sum of Rs. 2 lakhs. It was thereafter that on March 26, 1966, a notice was issued under section 148 of the Act informing the petitioner as under: " Whereas I have reason to believe that your income chargeable to tax for the assessment year 1950-51 has escaped assessment within the meaning of section 147 of the Income-tax Act, 1961; I, therefore, propose to reassess the income for the said assessment year and I hereby require you to deliver to me within 30 days from the date of service of this notice, a return in the prescribed form of your income assessable for the said assessment year; This notice is being issued after obtaining the necessary satisfaction of the Central Board of Revenue." This notice has been signed by the respondent as Income-tax Officer. A couple of days after the above notice was issued, on March 26, 1966, the respondent wrote another letter to the petitioner informing him that after obtaining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent has also denied the allegation of the petitioner objecting to the inclusion of the sum of Rs. 2 lakhs and interest in the total income for the relevant assessment year. Three contentions are urged by Mr. Kolah in support of the petition. Firstly, he contended that every primary fact required to be disclosed by the assessee was brought to the notice of the Income-tax Officer at the time of the original assessment ; that even the original letter of appointment dated October 11, 1943, and the letter terminating the services dated February 14, 1950, were filed before the Income-tax Officer ; that these facts are recorded both by the Income-tax Officer and the Appellate Assistant Commissioner in their respective orders ; that the genuineness of the agreement was gone into by the Income-tax Officer and the Appellate Assistant Commissioner and also by the Tribunal and their ultimate finding is based upon a conclusion that the original letter of appointment was a genuine one. His submission was that it is the duty of the assessee to put all primary facts before the Income-tax Officers and it is for the officers to draw their conclusions and inferences. Upon disclosure of all the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct I, Calcutta. The ratio of this decision has almost become locus classicus. It is the duty of an assessee to disclose all the primary facts which have a bearing on the question. The law does not require the assessee to state the conclusion that can reasonably be drawn from the primary facts. It is for the assessing authority to draw an inference from the material facts taken in conjunction with the surrounding circumstances. That was a case under section 34 of the Indian Income-tax Act, 1922, and the Supreme Court laid down that to confer jurisdiction under section 34 to issue notice in respect of assessments beyond the period of four years but within a 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 income, profits or gains chargeable to income-tax have been under-assessed. The second was that he must have also reason to believe that such under-assessment has occurred by reason of either : (i) omission or failure on the part of an assessee to make a return of his income under section 22 ; or (ii) omission or failure on the part of an assessee to disclose fully a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estigation. In other words, all that is necessary to give this special jurisdiction is that the Income-tax Officer had when he assessed some prima facie grounds for thinking that there had been some non-disclosure of material facts. It is the duty of the assessee who wants 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. The question whether the Income-tax Officer has reason to believe that under-assessment has occurred by reason of non-disclosure of material facts is a question of jurisdiction which can be investigated by the High Court in an application under article 226 of the Constitution. This principle laid down in the Calcutta Discount Co.'s case has been uniformly followed in all the later decisions. After accepting the ratio of this decision in S. Narayanappa v. Commissioner of Income-tax, the Supreme Court points out 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g during the relevant accounting year. It may also be incidentally mentioned that in the report submitted by the Income-tax Officer for obtaining the sanction of the Central Board of Direct Taxes neither the sum of Rs. 2 lakhs nor the interest thereon has been referred to and this circumstance is not relied upon by the Income-tax Officer for obtaining the permission or sanction. In this view of the matter, the part of the notice (sic), dated 28, 1966, giving reasons for reopening the assessment for the assessment year 1950-51 in so far as it relates to the sum of Rs. 2 lakhs and the interest thereon has to be quashed. The question then arises whether the conditions precedent laid down by section 147(a) of the Act are fulfilled in relation to the sum of Rs. 7 lakhs which is proposed to be included in the income of the assessee for the assessment year 1950-51. At the outset it should be said that during the entire course of the original assessment proceedings, the receipt of the sum of Rs. 7 lakhs by the assessee during the relevant accounting period was disclosed to the assessing authority and whether it was liable to tax or not was considered by all the authorities in their respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legality were beyond doubt. He also considered the provisions of section 7 of the Indian Income-tax Act, 1922, read with Explanation 2 thereto as they were then existing. In the order he has pointed out that the services of the petitioner were terminated by the company before the expiry of the full term of 25 years. By unilateral and premature termination of employment the assessee's rights were abrogated and he lost his source of employment. In that view of the matter, he took the view that if the services have in fact been terminated, the payment would certainly be compensation for loss of service. Once the amount is paid as compensation for loss of service nothing turns on the question whether the company made the payment without there being any dispute between the company and the petitioner or without the petitioner initiating any litigation to enforce the payment. The Appellate Assistant Commissioner ultimately took the view that the petitioner received the sum of Rs. 7 lakhs as substitution of the source of income and not as substitution of the income and he accordingly held that the said sum of Rs. 7 lakhs was received by the petitioner solely as compensation for loss of emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Justice Vivian Bose, a judge of the Supreme Court. It is as a result of the findings arrived at by the Commission in its report that the Income-tax Officer entertained a reasonable belief that the document or the copy which was produced at the time of the original assessment was not a genuine document ; that in fact it was forged and antedated and he relied upon the findings of the Commission which are contained in Chapter X of the report which related to the sum of Rs. 7 lakhs. As held in S. Narayanappa's case , the expression "reason to believe" does not mean a purely subjective action on the part of the Income-tax Officer. The belief must be held in good faith ; it cannot be merely a pretence. It is always open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. In the notice dated December 23, 1965, which was given to the petitioner for initiation of proceedings under section 147(a) of the Act an express reference had been made to the findings arrived at by the Vivian Bose Enquiry Commission in relation to the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that the letter of appointment dated October 11, 1943, and that of the letter of termination, dated February 7, 1950, although seen by the inspector and initialled by him for identification, were destroyed and its duplicates which were sent to the petitioner have not been produced ; (6) the fact that these two letters were destroyed in the face of definite instructions not to destroy them. The Commission found that the payment was also in disregard of honest commercial practice. The Commission has considered the evidence that was produced before it including that of the petitioner and has observed that "the explanation of the petitioner for not filing the original letter is unsatisfactory and is rejected. There is no proof of loss of the original. The income-tax consultant, Shri Srinivasan, has not been examined as a witness by the petitioner. This failure to produce the original which should be in the possession of either the petitioner or his income-tax consultant lends support to the conclusion that the letter, if produced, would have gone against him". It was contended before the Commission that the question as to the genuineness of the document should not be gone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educe the incidence of tax. All that is fraud." The Commission further pointed out: "What we are questioning here are the terms about the period of employment and the provision about the payment of compensation for the breach that finds place in the impugned letter. In our opinion that was an after-thought. We are of the view that those terms do not appear in the original contract. The scheme to defraud the exchequer by this ingenious device was devised later and the impugned letter was forged and antedated in furtherance of that scheme." (Underlining is ours). The conclusion has been summed up by the Commission as under: " In the circumstances indicated above, specially regarding the destruction of the letter immediately after the inspector had drawn up his report and in face of the fact that the inspector had questioned the genuineness of this document and initialled it and affixed the rubber stamp of his office to it ; and also in view of the failure of Shriyans Prasad Jain to produce before the Commission the original letter which was with him and the very important fact that during this period there were similar payments of compensation for the supposed breaches of ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had reason to believe that income had escaped assessment by reason of the appellant-firm's failure to disclose material facts and if the Commissioner had read the report carefully he could not have come to the conclusion that this was a fit cam for issuing a notice under section 148. The notice issued under section 148 was, therefore, invalid. As the decision turns upon its own facts and as the principles applied are well-settled this case is not of much assistance to us. Reliance was also placed by Mr. Kolah upon the decision of the Supreme Court in Commissioner of Income-tax v. Burlop Dealers Ltd. This case also was decided having regard to the appreciation of its facts and the Supreme Court took the view that the respondent had disclosed its books of account and evidence from which material facts could be discovered ; it was under no obligation to inform the Income-tax Officer about the possible inference that might be raised against it. It was for the officer to raise such an inference and if he had not done so in the original assessment, the income that escaped assessment could not be brought to tax under section 34(1)(a). Thus, in this case the test laid down in Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax . What we are concerned with at the present stage is only the question whether prior to issuing the notice under section 148 there was prima facie material for entertaining a reasonable belief that income has escaped assessment. Strong reliance is placed by Mr. Kolah upon the fact that the question whether the receipt of Rs. 7 lakhs was a receipt of a capital nature or not was directly gone into at the time of the original assessment by all the taxing authorities and by the High Court in the reference and the Appellate Assistant Commissioner, the Income-tax Tribunal and the High court came to the conclusion that the receipt of Rs. 7 lakhs was not income assessable to tax but was a receipt of a capital nature. The sub-mission was that in view of such a clear finding in the earlier proceedings at the stage of the original assessment, it cannot be said that the Income-tax Officer had, prima facie, material to entertain a reasonable belief that what has escaped assessment is income. It cannot be disputed that unless the Income-tax Officer entertains a reasonable belief that income has escaped assessment, it will not be open to him to initiate reassessment proceedings. Whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the absence of a term as to duration or of payment of compensation in the event of premature termination, payment of such a large amount will ordinarily be disproportionate to the compensation that can be expected by an employee having regard to the short duration for which he has rendered services to the company. It will be necessary in this connection to refer to the provisions of section 7 of the Indian Income-tax Act, 1922, as then existing. Explanation 2 to section 7 provided that a payment due to or received by an assessee from an employer or former employer or from a provident or other fund is to the extent to which it does not consist of contributions by the assessee or interest on such contributions a profit received in lieu of salary for the purposes of this sub-section, unless the payment is made solely as compensation for loss of employment and not by way of remuneration for past services. It is settled in view of this provision of Explanation 2 that if the object of the payment was not related to the relation between the employer and the employee it would not fall within the expression "profit received in lieu of salary". Reliance is placed by Mr. Kolah upon the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group of companies that group made huge profits and it was as a reward for such services that it considered it necessary to pay him such a large amount, then it cannot be said that no prima facie material exists to entertain a reasonable belief that what is paid was profit received in lieu of salary or remuneration for past services. It will be only at the final hearing that the question can ultimately be decided and the rival contentions both on behalf of the revenue and the assessee can be adjudicated upon and determined, but it is not possible to take the view that prima facie no material exists so as to warrant the Income-tax Officer to entertain a reasonable belief that what has escaped assessment is income in one view of the matter. It that is so, then at the stage of issuance of the notice under section 148 of the Act it will not be permissible to this to quash such a notice at the outset. The question then arises whether, having regard to the facts and circumstances of the case, action was justified only under the provisions of section 147(b) and not under those under section 147(a). Action under section 147(b) can be taken if notwithstanding that there has been no omiss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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