TMI Blog1960 (11) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... ULLAH., K. C. DAS GUPTA., J. C. SHAH., N. RAJAGOPALA AYYANGAR JUDGMENT [The judgment of S. K. DAS, DAS GUPTA and RAJAGOPALA AYYANGAR, JJ., was delivered by DAS GUPTA, J. HIDAYATULLAH and SHAH, JJ., delivered separate judgments.] DAS GUPTA, J.--This appeal is against an appellate decision of a Bench of the Calcutta High Court by which in reversal of the order made by the trial judge the Bench rejected the present appellant's application under article 226 of the Constitution. The appellant is a private limited company incorporated under the Indian Companies Act and has its registered office in Calcutta. It was assessed to income-tax for the assessment years 1942-43, 1943-44 and 1944-45, by three separate orders dated January 26, 1944, February 12, 1944 and February 15, 1945, respectively. These assessments were made under section 23(3) of the Indian Income-tax Act upon returns filed by it accompanied by statements of account. The first two assessments were made by Mr. L. D. Rozario the then Income-tax Officer and the last one by Mr. K. D. Banerjee. The taxes assessed were duly paid up. On March 28, 1951, three notices purporting to be under section 34 of the Indian Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider the section as it stood after the amendment in 1948, in deciding this question of jurisdiction. The relevant portion of the section was in these words : " 34. Income escaping assessment.--(1) If-- (a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee 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 been computed, or. (b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice for the assessment or reassessment beyond the period of four years, but within the period of eight years, from the end of the year in question. No dispute appears to have been raised at any stage in this case as regards the first condition not having been satisfied and we proceed on the basis that the Income-tax Officer had in fact reason to believe that there had been an under-assessment in each of the assessment years 1942-43, 1943-44 and 1944-45. The appellant's case has all along been that the second condition was not satisfied. As admittedly the appellant had filed its return of income under section 22, the Income-tax Officer could have no reason to believe that under-assessment had resulted from the failure to make a return of income. The only question is whether the Income-tax Officer had reason to believe that " there had been some omission or failure to disclose fully and truly all material facts necessary for the assessment " for any of these years in consequence of which the under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the facts necessary for your purpose : My duty is done with disclosing these account books and the documents." His omission to bring to the assessing authority's attention those particular items in the account books, or the particular portions of the documents, which are relevant, will amount to " omission to disclose fully and truly all material facts necessary for his assessment." Nor will be be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section gives a quietus to all such contentions; and the position remains that so far as primary facts are concerned, it is 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. Does the duty, however, extend beyond the full and truthful disclosure of all primary facts? In our opinion, the answer to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome prima facie grounds for thinking that there had been some non-disclosure of material facts. Clearly 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. To establish this, the company has relied on the statements in the assessment orders for the three years in question and on the statement of Kanakendra Narayan Banerjee in the report made by him to the Commissioner of Income-tax for the purpose of obtaining sanction to initiate proceedings under section 34 and also on his statement in the affidavit on oath in reply to the writ petition. The report is in these words : "Profit of Rs. 5,48,002 on sale of shares and securities escaped assessment altogether. At the time of the original assessment the then Income-tax Officer merely accepted the company's version that the sale of shares were casual transactions and were in the nature of mere change of investments. Now the results of the company's trading from year to year show that the company has really been systematically carrying on a trade in the sale of inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t disclosed that the sale of shares had been of the nature of a trading sale, made in pursuance of an intention to make a business profit and not of the nature of a change of investment, made in pursuance of an intention to put certain capital assets into another form. If that be so, it is equally clear that the Income-tax Officer who, by the way, was a successor to the officers who had made the original assessments was not merely changing his opinion as to facts previously known, but was taking notice of a new fact." The learned Chief Justice seems to have proceeded on the basis that when from certain facts inferences are to be drawn there is a duty on the assessee to state what the correct inference should be and if he has made a wrong statement as regards the inference to be drawn that also is an " omission or failure to disclose a material fact. " For the reasons given earlier we do not think that this is the correct position in law. It is clear, therefore, that if one looked at this report only it would not be possible to say that the Income-tax Officer had any non-disclosure of material facts by the assessee in mind when he assumed jurisdiction. It has to be remembered, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessable income of the company it having been then discovered that the petitioner was in fact carrying on business in shares contrary to its representation that it was not. The company filed appeals before the Appellate Assistant Commissioner, which were rejected in September, 1950, and the assessments were confirmed. The company thereafter filed second appeals before the Income-tax Tribunal which appeals are now pending. 7. With reference to paragraph 5 of the said petition, I deny that I pretended to act under section 34 of the Income-tax Act as alleged. I have reasons to believe that by reason of the omission or failure of the company to disclose fully and truly all material facts necessary for its assessments, the income, profits and gains chargeable to income-tax had been under-assessed. I recorded my reasons and made three reports (one for each year) in the prescribed form and submitted them before the Commissioner of Income-tax and the latter was satisfied that it was a fit case for issue of a notice under section 34 of the Income-tax Act. Thereafter I issued the prescribed notices under section 34 of the Income-tax Act. The said reports were made and notices issued in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s had not been disclosed ; the other that the memorandum and articles of association of the company had not been shown. This suggestion is against the record and we have no hesitation in repelling it. Not only is it not the ground set out by the Income-tax Officer at any stage, not even in the affidavit in court, but the matters mentioned by the Officer that the assessee had claimed that the profits realised were of a casual nature obviously indicates that the assessee disclosed that a surplus resulted from the sales which were also disclosed. The assessment orders it is true do not mention the details of the sales. They state, however, that the audited accounts of the company were furnished. The sales of shares were expressly mentioned in the report. In these circumstances, it is reasonable to believe that as regards sales of shares full details were in fact disclosed. Nor can we believe that the two Income-tax Officers, L. D. Rozario and K. D. Banerjee, concluded the proceedings without referring to the memorandum and articles of association of the company. These officers knew well that the company was claiming to be an investment company only. They had to consider the ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heme of the law clearly is that where the Income-tax Officer has reason to believe that an underassessment has resulted from non-disclosure he shall have jurisdiction to start proceedings for reassessment within a period of 8 years ; and where he has reason to believe that an under-assessment has resulted from other causes he shall have jurisdiction to start proceedings for reassessment within 4 years. Both the conditions, (i) the Income-tax Officer having reason to believe that there has been under-assessment and (ii) his having reason to believe that such under-assessment has resulted from non-disclosure of material facts, must co-exist before the Income-tax Officer has jurisdiction to start proceedings after the expiry of 4 years. The argument that the court ought not to investigate the existence of one of these conditions, viz., that the Income-tax Officer has reason to believe that under-assessment has resulted from nondisclosure of material facts, cannot therefore be accepted. Mr. Sastri next pointed out that at the stage when the Income-tax Officer issued the notices he was not acting judicially or quasi-judicially and so a writ of certiorari or prohibition cannot issue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the parties on the several questions raised in the petition and without prejudice to the orders that may ultimately be passed by the court. The fact that the assessment orders have already been made does not therefore affect the company's right to obtain relief under article 226. In view, however, of the fact that the assessment orders have already been made we think it proper that in addition to an order directing the Income-tax Officer not to take any action on the basis of the impugned notices a further order quashing the assessment made be also issued. In the result, we allow the appeal, set aside the order made by the appellate Bench of the Calcutta High Court and restore the order made by the trial judge, Bose, J. The assessment orders made in the proceedings started under section 34 of the Income-tax Act are also quashed. The appellant will get its costs here and below. SHAH, J.--I regret inability to agree with the judgment delivered by my learned brother Mr. Justice Das Gupta. The facts which give rise to this appeal have been fully set out by my learned brother and it is not necessary to reiterate the same. Sub-section (1) of section 34 of the Indian I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a non-resident person under section 43, this sub-section shall have effect as if for the periods of eight years and four years a period of one year was substituted. Explanation.--Production before the Income-tax Officer of account books or other evidence from which material facts could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section." This section provides machinery for assessment or reassessment if it be found that income, profits or gains " have escaped assessment or have been under-assessed or assessed at too low a rate or have been made subject to excessive relief under the Act or excessive loss or depreciation allowance has been computed," which expression may for convenience of reference be compendiously referred to as are or have been underassessed. Notice under section 34(1)(a) may be issued if the Income-tax Officer has reason to believe that income in any year has been underassessed by reason of the failure on the part of the assessee to make a return of his income, or to disclose fully and truly all material facts necessary for assessment for the year in question. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed by reason of failure to disclose fully and truly the facts material for assessment, the existence of the belief and the reasons for the belief, but not the sufficiency of the reasons, will be justiciable. The expression therefore predicates that the Income-tax Officer holds the belief induced by the existence of reasons for holding such belief. It contemplates existence of reasons on which the belief is founded, and not merely a belief in the existence of reasons inducing the belief ; in other words, the Income-tax Officer must on information at his disposal believe that income has been under-assessed by reason of failure fully and truly to disclose all material facts necessary for assessment. Such a belief, be it said, may not be based on mere suspicion : it must be founded upon information. That the Income-tax Officer had reason to believe that there was under-assessment in the material years was not challenged by the appellant and in our opinion rightly. There are on the record the reports of the Income-tax Officer in which the belief is expressly set out It also appears from the assessment orders for the years 1945-46 and 1946-47 that tax has been assessed on the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring upon a reappraisal of the evidence. But it is contended on behalf of the company that the finding is based on no materials, and to that plea I may advert. By section 22 of the Income-tax Act, a duty is imposed upon every taxpayer whose total income exceeds the maximum which is not chargeable to income-tax to make a return in the prescribed form and verified in the prescribed manner, setting forth his total income during that year. If the taxpayer making the return fails to disclose fully and truly all material facts necessary for the assessment of the year in question, the jurisdiction of the Income-tax Officer to reassess is invited. The company in its petition for the issue of a writ contended by paragraph 7 that the notices were ultra vires and illegal and that the Income-tax Officer was not invested with jurisdiction to proceed thereunder, inter alia, for the reason that the " pretended notice was issued without the existence of the necessary conditions precedent which confers jurisdiction under section 34 aforementioned, whether before or after amendment in 1948." The Income-tax Officer, by his affidavit, submitted : Paragraph 4 : " The statements made in paragraph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to act under section 34 of the Income-tax Act as alleged. I have reasons to believe that by reason of the omission or failure of the company to disclose fully and truly all material facts necessary for its assessments, the income, profits and gains chargeable to income-tax had been under-assessed. I recorded my reasons and made 3 reports (one for each year) in the prescribed form and submitted them before the Commissioner of Income-tax and the latter was satisfied that is was a fit case for issue of a notice under section 34 of the Income-tax Act. Thereafter I issued prescribed notices under section 34 of the Income-tax Act. The said reports were made and notices issued in respect of all the three years mentioned in the petition and copies of the report and notice for one of such years are included in the schedule hereto annexed and marked 'A '. The report and notices for the two other years are exactly similar." By these averments, the Income-tax Officer asserted (a) that he had reasons to believe that by reason of the omission or failure of the company to disclose fully and truly all material facts necessary for the assessment, income chargeable to income-tax had been under-as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Officer committed an error, he could not seek to commence proceedings for reassessment on being apprised of the error. It was said that the Income-tax Officer knew that the company was an investment corporation, that the shares held by the company were sold from time to time, and that profits were earned by the sale of those shares, and that on these materials the Income-tax Officer might have held that the company was a dealer in shares, but if he did not draw that inference, the under-assessment, if any, was not by reason of failure to disclose fully and truly all material facts. Counsel submitted that the condition of the exercise of jurisdiction under section 34 is failure to disclose fully and truly all material facts necessary for assessment and not failure to instruct the Income-tax Officer about the legal inference to be drawn from the facts disclosed. The duty imposed by the Act upon the taxpayer is to make a full and true disclosure of all material facts necessary for the assessment ; he is not required to inform the Income-tax Officer as to what legal inference should be drawn from the facts disclosed by him nor to advise him on questions of law. Whether on the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be taxable." From that order of assessment, it is manifest that the assessing officer held that the company was formed with the object of acquiring, holding, exchanging, selling and dealing in shares, that the shares acquired became the trading assets of the company to be disposed of when opportunities occurred for earning profits ; and that the activities of selling shares in which surplus assets of the company were invested were a part of the regular business carried on by the company. There is no evidence that the memorandum and articles of association referred to in paragraph 4 of the affidavit were produced in the course of the assessment of the relevant years ; nor is there evidence to show that it was disclosed that the acquisition of shares was incidental to the business activities and out of the surplus assets of the company and that the same were sold at profit as opportunities arose. There is also no ground for assuming that these facts must have been known to the Income-tax Officer. Counsel for the company suggested somewhat casually that under the Income-tax Rules and the practice prevailing with the Income-tax Officer, the memorandum and articles of associatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... memorandum and articles of association showing the purposes for which the company was incorporated, and (2) that the shares were acquired as part of the business of financiers. The company also made a statement which is partially untrue when it stated that sales were mere casual transactions. There were materials before the Income-tax Officer on which he had reason to believe that by reason of the failure of the company to fully and truly disclose material facts, its income was underassessed. Whether on these facts, a conclusion that in fact the company was carrying on the business of trading in shares could be founded is at this stage entirely immaterial. If there was reason to believe, the alleged inadequacy of the materials on which the belief could be founded is of no moment. The Income-tax Officer has commenced proceedings for reassessment by issuing notices against the company and he has placed all the materials before the court on which it could be said that he had reason to believe that income of the company had been underassessed by reason of failure on the part of the company to disclose fully and truly all material facts relating to the assessment and if, on those mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escaped assessment, etc. In the present case, the appellant company, which is an investment company, had produced in the back years a list of the shares sold by it, the statements of profit and loss account, and, I am prepared to assume, also the memorandum and articles of association. But the appellant company gave out that the sales of shares were casual transactions of change of investments. This statement was accepted, though it was found that in later years the company was dealing in stocks and shares as a business venture, and its statement which was accepted was not perhaps true. The Income-tax Officer reported the matter to the Commissioner, and stated as follows : " Profits of Rs. 5,48,002 on sale of shares and securities escaped assessment altogether. At the time of the original assessment the then Income-tax Officer merely accepted the company's version that the sales of shares were casual transactions and were in the nature of mere change of investments. Now the results of the company's trading from year to year show that the company has really been systematically carrying out a trade in the sale of investments. As such, the company has failed to disclose t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action under section 34 of the Act. The following example explains the meaning. Taking the present case, I set below two statements, one involving full disclosure and a contention, and the other, only a contention with a material fact suppressed : "(1). We are a trading company and our business is according to our memorandum of association 'to acquire, hold, exchange, sell and deal in shares, stocks, etc.' These sales, however, were not business sales but only change of investments into trustee securities as decided by the trustees. (2). We changed industrial shares into trustee securities because ' in or about 1934, the trustees decided to convert the Indian Industrial Shares held by the appellant into trustee securities'." If the first is decided in favour of the assessee, there is an inference or decision by the Income-tax Officer from a full and true disclosure. If the second is decided in favour of the assessee, the question would arise if there was full and true disclosure. In the present case, the question whether the transactions were casual transactions of changing investments or regular trading in stocks and shares involves not merely an inference, because ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
