Reassessment and share-sale profits: later information justified reopening, and share disposals by an investment company were taxable as business income.

Reassessment under section 34(1)(b) of the Indian Income-tax Act, 1922 was upheld where the original return and reconciliation statements did not clearly disclose the true nature of share-sale profits, and later information gave the officer reasonable grounds to believe income had escaped assessment. The company's objects permitted acquiring, holding, selling and turning to account shares, and its repeated replacement of investments showed a business activity rather than a mere capital adjustment. The articles and treatment of the surplus as capital reserve did not alter the tax character. The surplus on sale of shares was therefore treated as business profits taxable in the Revenue's favour.

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Issues: (i) Whether the reassessment under section 34(1)(b) of the Indian Income-tax Act, 1922 was valid in the absence of a full and true disclosure and on the basis of later information; (ii) Whether profits arising from the sale of shares held by an investment company were business profits chargeable to tax.

Issue (i): Whether the reassessment under section 34(1)(b) of the Indian Income-tax Act, 1922 was valid in the absence of a full and true disclosure and on the basis of later information.

Analysis: The disclosure made with the original return, including the reconciliation statements, did not clearly reveal the profits from sale of shares so as to put the Income-tax Officer on notice of the true nature of the transactions. The later letter furnished material from which the officer could reasonably believe that income had escaped assessment. The statutory condition is not mere suspicion but reasonable grounds based on information in possession of the officer.

Conclusion: The reassessment was valid and the challenge based on disclosure and jurisdiction failed, in favour of the Revenue.

Issue (ii): Whether profits arising from the sale of shares held by an investment company were business profits chargeable to tax.

Analysis: The company's memorandum included objects to acquire, hold, sell, dispose of and turn to account shares and other property, and the clause excluding restrictive construction made those objects independent. On the facts, the repeated realisation and replacement of investments was part of the normal business activity and not a mere change of capital investment simpliciter. Article 76 of the articles of association could not override the memorandum, and the treatment of the surplus as capital reserve did not alter its tax character.

Conclusion: The surplus on sale of shares was taxable as business profits, in favour of the Revenue.

Final Conclusion: The reference was answered against the assessee on the substantive questions decided, and the tax authorities' view was upheld.

Ratio Decidendi: Where an assessee's own materials do not clearly disclose the true nature of share-sale profits, later information may validly found reopening under section 34(1)(b); and where the company's objects and business activity show that sale and turning to account of shares form part of the business, the surplus is revenue income taxable as business profits.

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