1963 (3) TMI 61 - HC - Income Tax

Court upholds reassessment under Section 34(1)(b) of Income-tax Act on shares subscription as capital asset

The court dismissed the petitions and upheld the validity of the reassessment proceedings initiated by the Income-tax Officer (ITO) under Section 34(1)(b) ... - Issues Involved:1. Jurisdiction under Section 34(1)(b) of the Indian Income-tax Act.2. Definition of 'capital asset' under Section 2(4A) of the Indian Income-tax Act.3. Validity of reassessment based on 'information' and 'reason to believe' that income had escaped assessment.Detailed Analysis:1. Jurisdiction under Section 34(1)(b) of the Indian Income-tax Act:The petitioner, Hari Brothers Private Limited, challenged the notice issued under Section 34(1)(b) of the Indian Income-tax Act, arguing that the Income-tax Officer (ITO) lacked jurisdiction. The petitioner contended that the ITO did not possess any new 'information' subsequent to the original assessment, nor was there any new information about the true state of the law. The petitioner argued that all materials were already before the ITO during the original assessment, and hence, the reopening of the assessment was without jurisdiction.The respondents argued that the decision of the Appellate Tribunal constituted 'information' that allowed the ITO to reopen the assessment under Section 34(1)(b). They maintained that the ITO could reassess the income under a different head (from 'business' to 'capital gains') based on the Tribunal's interpretation of the law.The court, referring to the Supreme Court's decision in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax, held that the term 'information' in Section 34(1)(b) includes information as to the true and correct state of the law and judicial decisions. Thus, the ITO's action to reopen the assessment was justified and within jurisdiction.2. Definition of 'capital asset' under Section 2(4A) of the Indian Income-tax Act:The petitioner argued that the sale of the right to subscribe for shares did not constitute a 'capital asset' and should not be taxed as such. The court examined Section 2(4A), which defines 'capital asset' as property of any kind held by an assessee, excluding stock-in-trade, personal effects, and agricultural land. The court noted that the term 'property' has a wide amplitude and includes rights to subscribe for shares.The court concluded that the right to subscribe for shares is indeed a 'capital asset' and falls within the definition provided in Section 2(4A). Therefore, the income from the sale of these rights could be taxed as 'capital gains.'3. Validity of reassessment based on 'information' and 'reason to believe' that income had escaped assessment:The petitioner contended that the ITO had no new 'information' and no 'reason to believe' that income had escaped assessment. They argued that the ITO's action was merely a change of opinion based on the same facts and figures already available during the original assessment.The court referred to multiple precedents, including the Supreme Court's decision in Chatturam Horilram Ltd. v. Commissioner of Income-tax, which clarified that 'information' could include judicial decisions and interpretations of the law. The court also cited the Supreme Court's observation that the term 'escaped assessment' includes cases where the ITO erroneously fails to tax a part of the assessable income, even if a return had been submitted.The court held that the decision of the Appellate Tribunal provided new 'information' regarding the correct legal interpretation, which justified the ITO's belief that income had escaped assessment. Therefore, the reassessment proceedings under Section 34(1)(b) were valid.Conclusion:The petitions were dismissed, and the court upheld the validity of the reassessment proceedings initiated by the ITO under Section 34(1)(b) of the Indian Income-tax Act. The court ruled that the right to subscribe for shares is a 'capital asset' and that the ITO had the jurisdiction to reopen the assessment based on new 'information' provided by the Appellate Tribunal's decision.