TaxTMI 
TaxTMI 
1972 (12) TMI 28
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....ise to this reference may be shortly stated: The assessee is a Hindu undivided family and the relevant year of account is S. Y. 2,000, i. e., November 30, 1943, to October 17 1944. The assessment year is 1945-46. On January 23, 1947, the assessee was originally assessed in respect of this particular assessment year and the total income of the Hindu undivided family was held to be Rs. 67,605. It appears that in the course of S.Y. 2,000, the karta of this Hindu undivided family had entered into an agreement to purchase 6,708 sq. yds. of land situated at Ghee-Kanta, Ahmedabad, by an agreement of purchase dated April 5, 1944. The vendor of this plot of land was Ambalal Sarabhai, a well-known industrialist of Ahmedabad. On July 1, 1944, the karta of the assessee-family entered into an agreement to sell 5,200 sq. yds. out of this total plot of 6,708 sq. yds. to a firm called Messrs. Nagardas and Co. of Wadhwan. The agreement of sale recited that the purchase price which K. Nagardas and Co. was to pay to the assessee was at the rate of Rs. 185 per sq. yd. A sum of Rs. 3,05,000 was to be paid as earnest money in two instalments. The first instalment of Rs. 1,05,000 was paid by Messrs. K. ....
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....perty to Messrs. K. Nagardas and Co., the receipt for the payment of Rs. 1,05,000 dated June 14, 1944, and the correspondence between the assessee's pleader and the reply, dated November 18, 1944, were all produced before the Income-tax Officer; and after perusing all those documents, he completed the assessment on January 23, 1947. At the time of that assessment order, no reference was made in the assessment order itself to this transaction of the amount of Rs. 3,05,000 but a note was made on January 23, 1947, by the Income-tax Officer and the note was kept on the record of the case. The note was regarding Rs. 78,000 out of the aggregate amount of Rs. 3,05,000 received from Nagardas Khodidas, the sole proprietor of Messrs. K. Nagardas and Co., as earnest money. Instead of crediting this full sum of Rs. 3,05,000 in the books of account, only the sum of Rs. 78,000 out of this sum of Rs. 3,05,000 was credited as pointed out above. The explanation of the karta of the assessee-family for this "strange conduct" (as it was called by the Income-tax Officer) was that the karta wanted to keep this loan hidden from his gumasthas to protect his reputation; and the Income-tax Officer noted th....
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....tax Officer considered that there had been omission or failure on the part of the assessee to furnish correct facts at the time of the original assessment; and he, therefore, issued a notice under section 34(1)(a) of the Act for the assessment year 1945-46; and this notice was served on the assessee on March 30, 1954. Pursuant to this notice, the assessee filed a return on April 2, 1954, but he challenged the validity of the proceedings under section 34(1)(a). In spite of this challenge, the Income-tax Officer proceeded with the assessment and, in the course of the proceedings, a commission was issued to the Income-tax Officer, Surendranagar, to examine Nagardas Khodidas as well as one, M. K. Kamdar, brother-in-law of Nagardas and friend of the assessee. M. K. Kamdar was alleged to have signed as a witness at the foot of the agreement, dated July 1, 1944, entered into between the assessee and K. Nagardas and Co. Nagardas repeated his version of the loan of Rs. 2,00,000, which was subsequently returned. In the course of this statement, Nagardas stated that he did not remember having signed any memorandum of agreement of purchase on July 1, 1944, but he further stated that if he exe....
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....jected both the contentions. As regards the contention that the case of the assessee fell under section 34(1)(b) and not under section 34(1)(a), the Tribunal dealt with that point in paragraph 3 of its order and the relevant portion is in these terms: "In so far as the Income-tax Officer was concerned, he believed the statement of Nagardas. He, therefore, had reason to believe that the assessee did not disclose fully and truly all material facts necessary for his assessment. It appears that at the time of the original assessment, the assessee was examined in respect of a sum of Rs. 3,05,000 and he had given an explanation which, at that time, was accepted by the Income-tax Officer. Because the explanation then offered was accepted by the Income-tax Officer does not mean that the assessee had fully and truly disclosed all material facts necessary for his assessment. It is only after all the material is on record that one can say whether the assessee had fully and truly disclosed all material facts. In so far as the Income-tax Officer who reassessed the assessee was concerned, he accepted the statement of Nagardas without getting it tested by cross-examination by the assessee. It is....
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....he assessee's contention on merits and held that, on the basis of the information received from the Income-tax Officer, Surendranagar, the Income-tax Officer in charge of the assessee's case could entertain an honest belief that the information given by the assessee in 1947 was not correct and the assessee's objection to the issue of the notice under section 34(1)(a) was rejected. The Tribunal also held that the reassessment was completed within the period of limitation. The Tribunal examined the justification for adding the sum of Rs. 3,05,000 as part of the assessee's income for S.Y. 2000 and held that the quantum of undisclosed income in the year of account was Rs. 1,78,000; and thus, the assessee's appeal was partly allowed. Thereafter, at the instance of the assessee, the following two questions were referred to this court under section 66(1) of the Act: "(1) Whether, on the facts and in the circumstances of the case, the assessee could validly raise an objection to the issue of notice under section 34(1)(a) ? (2) If the answer to question No. 1 is in the affirmative, whether the facts and the circumstances of the case justified the issue of notice under section 34(1)(a) ?"....
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....uestion which is the second question in this case. In view of this statement of the learned Advocate-General, we will now proceed to examine the legal point arising from the second question. Section 34(1)(a) of the Act, so far as is material for the purposes of this judgment, provided at the relevant time as follows: "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 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.... he may in cases falling under clause (a) at any time and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be includ....
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....be drawn from these material facts which the assessee was under no obligation to disclose; if the assessee puts all the material facts or what have been referred to in the subsequent decisions as "primary facts", he has disclosed all that he is bound to do and merely because a different inference is to be drawn from those primary or material facts, according to the revenue, it cannot be said that there was omission or failure on the part of the assessee to disclose truly and fully all material facts necessary for his assessment for the year in question. In Kanji Ranchhod v. Commissioner of Income-tax, a Division Bench of this High Court, consisting of Shelat C. J. and one of us, considered the principles laid down by the Supreme Court in Calcutta Discount Co.'s case, and held that in proceedings for reassessment under section 34 of the Indian Income-tax Act, 1922, though the court cannot investigate into the adequacy or otherwise of the grounds on which the reason to believe on the part of the Income-tax Officer rests, the assessee is entitled to show that there was no material at all on which the Income-tax Officer could found such belief, that is, have reason for such belief. Th....
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.... 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-assessment or under-assessment, etc., consequent upon such omission or failure. It would, therefore, follow that primary facts necessary for a proper assessment are objective facts, the existence or non-existence of which is not a matter of reasonable belief on the part of an Income-tax Officer. An Income-tax Officer cannot say that he had reason to believe that a certain fact which was relevant for assessment and therefore a primary fact existed and that it wa....
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....essment year 1959-60. Later, he issued a notice on May 15, 1964, in respect of the said amount of Rs. 5,936 for the assessment year 1958-59 under section 147(a) of the Income-tax Act, 1961, as income which had escaped assessment; and the learned judge of the Allahabad High Court held that the notice issued after a lapse of four years was without jurisdiction. The learned judge relied upon the decision of the Supreme Court in Calcutta Discount.Co.'s case. An attempt was made on behalf of the revenue to distinguish the Supreme Court decision and it was sought to be urged that the Supreme Court case would have no application to the facts of the case before the Allahabad High Court. It was observed by the learned judge of the Allahabad High Court: "The primary fact in the case of a cash credit would be the disclosure of the amount supported by the receipts or documents to support the alleged source. The conclusion whether it in fact represents the sale of those ornaments or is income from an undisclosed source would be an inference to be drawn by the Income-tax Officer. It is idle for the department to contend that the assessee himself should in the case of every cash credit admit, co....
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.... income had escaped assessment on account of the failure of the assessee to disclose fully and truly all material facts necessary for such assessment. We may point out that in this decision of the Andhra Pradesh High Court, the decisions of the Supreme Court in Kantamani Venkata Narayana, and Sons v. First Additional Income-tax Officer and S. Narayanappa v. Commissioner of Income-tax were referred to as instances where the Supreme Court interpreted the scope of section 34(1)(a). In Commissioner of Income-tax v. Hemchandra Kar the Supreme Court held on the facts of the case before it that, as the primary facts were within the knowledge of the Income-tax Officer, the escapement of income took place by reason of the failure of the Income-tax Officer to include the amount in question in the assessment of the assessee when he was in full possession of all the necessary material facts and that in such a situation the requirements of section 34(1)(a) were not satisfied. At page 4 of the report Grover J., delivering the judgment of the Supreme Court, observed: "What has to be seen is whether the Income-tax Officer could have reason to believe that due to omission or failure on the part ....
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....authorities as indicating that the entries in the earlier years of account were bogus, came into existence much later after the closing of the relevant years of account; and on the basis of those facts which subsequently came into existence and on the basis of the valuation arrived at by the Income-tax Officer on his own subsequent inquiries, he wanted to proceed under section 34(1)(a); and it was held that since the facts on which the Income-tax Officer wanted to rely had come into existence subsequently, it could not be said that there was non-disclosure on the part of the assessee at the time when he filed the original return of assessment. Mr. Kaji, the learned advocate appearing on behalf of the assessee, relied upon the following passage from the judgment of the Delhi High Court at page 815 of the report: "This sale deed would have been a material fact if it had been executed at any time prior to the assessment because then its disclosure either in the return or at the time of assessment would have been necessary for the assessment for that year as the credits standing in the names of the Ranas would have to be adjusted. Its non-disclosure at the time of assessment would cer....
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....erial facts necessary for assessment of the company for the three years in question, any income, profits or gains chargeable to income-tax had escaped assessment. Again this decision of the Supreme Court in Modi Spinning and Weaving Mills Co.'s case, does not throw any further light on the principles governing issuance of notice under section 34(1)(a). As against these different decisions of this High Court, Allahabad High Court, Andhra Pradesh High Court, Delhi High Court and Assam and Nagaland High Court, we have three decisions of the Supreme Court all interpreting section 34(1)(a) and laying down the requirements to be met before a notice under section 34(1)(a) can be issued. In S. Narayanappa v. Commissioner of Income-tax, Ramaswami J., delivering the judgment of the Supreme Court, observed at page 221 of the report: "It is true that two conditions must be satisfied in order to confer jurisdiction on the Income-tax Officer to issue the notice under section 34(1) in respect of assessments beyond the period of four years, but within a period of eight years, from the end of the relevant year. The first condition is that the Income-tax Officer must have reason to believe that t....
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.... the Income-tax Officer in starting proceeding under section 34 is open to challenge in a court of law only to a limited extent, viz.: (1) whether the Income-tax Officer held the belief that there had been such non-disclosure; and (2) the belief must be held in good faith; it cannot be merely a pretence; and it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing upon the formation of the belief and are not extraneous or irrelevant for the purpose of the section. Therefore, if there are in fact reasonable grounds for the Income-tax Officer to believe that there was any non-disclosure of material facts, it is open to him to issue a notice and the issuance of the notice is open to challenge in a court of law to the limited extent indicated above, viz (1) that such belief was not at all held; or (2) that the belief was not held in good faith and was merely a pretence. In Kantamani Venkata Narayana and Sons v. First Additional Income-tax Officer, a portion of the above passage from the judgment of Ramaswami J. in S. Narayanappa's case was cited and Shah J., delivering the judgment of the Supreme Court, observe....
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....on 34(1)(a). There, after the original assessment of the assessee for the assessment year 1943-44 was completed, the Income-tax Officer found that the assessee had a current account in the name of his father-in-law till the latter's death. that the assessee had failed to disclose the advance of a sum of Rs. 70,000 and that in the relevant returns the assessee had not shown income from property in the names of his sons, wife and daughter though many of the properties were purchased by him in their names. In the light of the material newly gathered the Income-tax Officer also felt that certain cash credits in the assessee's account books to the extent of Rs. 5 lakhs were not genuine. On September 5, 1959, the Income-tax Officer issued notices under section 34(1)(a) of the Indian Income-tax Act, 1922, to reopen the assessments for the years 1943-44 to 1949-50. The assessee filed writ petitions in the High Court challenging the legality of the notices but the petitions were dismissed. The matter was carried in appeal to the Supreme Court, where it was held that on the facts there was some material before the Income-tax Officer on which he formed the prima facie belief that the assessee....
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.... had agreed to pay to Ratiram Tansukhrai 50% of the profit earned by it from the business with H. Manory Ltd. Stating these facts, for the assessment year 1949-50, the assessee submitted the profit and loss account disclosing in the relevant year of account Rs. 1,75,875 as profit in a joint venture from H. Manory Ltd. It also claimed that an amount of Rs. 87,937, being half of the amount of this profit from H. Manory Ltd., has been paid by the assessee to Ratiram Tansukhrai under the agreement of October 7, 1948. The Income-tax Officer accepted the return filed by the assessee and included in computing the total income for the assessment year 1949-50, Rs. 87,937 only, as the profit earned in the joint venture of H. Manory Ltd. In the assessment year 1950-51 the assessee filed a return also accompanied by a profit and loss account disclosing a total profit of Rs. 1,62,155 in the relevant accounting years as the profit received from H. Manory Ltd. and claimed that out of this amount of profit it had transferred Rs. 81,077 to the account of Ratiram Tansukhrai as his share. The Income-tax Officer on examination of the transaction brought to tax the entire amount of Rs. 1,62,155 holdin....
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.... the report: "We are of the view that under section 34(1)(a) if the assessee had disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income-tax Officer about the inference which the Income-tax Officer may raise from those facts. The terms of the Explanation to section 34(1) also do not impose a more onerous obligation. Mere production of the books of account or other evidence from which material facts could with due diligence have been discovered does not necessarily amount to disclosure within the meaning of section 34(1); but where on the evidence and the materials produced the Income-tax Officer could have reached a conclusion other than the one which he has reached, a proceeding under section 34(1)(a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he may later regard as erroneous." In view of this interpretation regarding the scope of the provisions of section 34(1)(a), the Supreme Court held on the facts of the case before it that the assessee had disclosed its books of account and evidence from which material facts could be discovered. The assessee was under no obligation to inform the In....
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....an inference to be drawn from primary facts. If the assessee has disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income-tax Officer about the inference which the Income-tax Officer may raise from those facts. Further, where on the evidence and material produced at the time of the original assessment the Income-tax Officer could have reached a conclusion other than the one which he has reached, the proceeding under section 34(1)(a) will not lie merely on the ground that the Income-tax Officer had earlier raised an inference which he may later regard as erroneous. In view of these authoritative pronouncements by the Supreme Court on the scope of the powers and jurisdiction of the Income-tax Officer to issue a notice under section 34(1)(a), it is clear that the decision of this High Court in Kanji Ranchhod's case, in so far as it lays down that the primary facts necessary for proper assessment are objective facts, the existence or non-existence of which is not a matter of reasonable belief on the part of the Income-tax Officer, is an extension of the principle laid down in Calcutta Discount Co.'s case, but in view of the decisions of the ....
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.... adverse to the assessee when he passed the order on January 23, 1947, regarding the entire transaction in favour of M/s. K. Nagardas and Co., yet instead of drawing an adverse inference against the assessee, the Income-tax Officer rested himself content with observing that the matter between the assessee and M/s. K. Nagardas and Co. had not been finally settled and the assessee was in possession and ownership of the whole property known as Maganbhai's Vadi. The assessee was under no obligation to put forward before the Income-tax Officer at the time of the original assessment a version contrary to the version that he was contending for, viz., that he had agreed to sell this property to M/s. K. Nagardas and Co. In our opinion, at the time of the original assessment, all the primary facts having been placed before the Income-tax Officer, it was open to the Income-tax Officer then not to accept the version of the assessee and to bring to tax the amount of Rs. 3,05,000. In the circumstances, the question whether this particular transaction between the assessee and M /S. K. Nagardas and Co. was genuine or not was an inference of fact to be drawn from the primary facts placed before the....