TaxTMI 
TaxTMI 
1962 (10) TMI 77
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....see's father, Viswanathan Chettiar. Both the partners were Nattukottai Chettiars and they were good friends. Viswanathan Chettiar purchased from Volkarts United Press Co. Ltd. a ginning factory at Nallatinpudur. The business, started in the name of Viswanathan Ginning Factory, was intended to serve as a feeder to Sri Meenakshi Mills Ltd., Madurai, of which Thiagarajan Chettiar was the managing agent. Viswanathan Chettiar was also the director in Meenakshi Mills Ltd. The partnership agreement between Viswanathan Chettiar and Thiagarajan Chettiar provided that the business at Nallatinpudur was to be run in the name and style of Karunganni Factory for a period of twenty years and that the profits were to be divided equally between them and that inasmuch as Viswanathan Chettiar had paid the purchase price for the acquisition of the factory the share of profits of Thiagarajan Chettiar was to be adjusted towards the partnership capital till it was made up. Thereafter, the profits were to be divided equally. The factory was to be managed by Thiagarajan Chettiar who was to maintain proper accounts and send copies of account and balance-sheet every month to Viswanathan Chettiar. Viswana....
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....it held that the said lease was not a bona fide lease and passed a preliminary decree for dissolution of partnership and rendition of accounts as prayed for by the assessee. Karumuthu Thiagaraja preferred an appeal to this court in A.S. No. 565 of 1950 and a Division Bench of this court affirmed the finding of the Subordinate Judge in regard to the nature of the lease. It is not necessary to refer to the actual decree passed by this court on appeal, as it is not relevant for the present purpose. In paragraph 15 of the judgment of this court Ramaswami J. observed thus (dealing with the lease): "On this point we are in entire agreement with the learned Subordinate Judge that the so called leases are not bona fide leases binding upon the plaintiff but only colourable and fraudulent transactions entered into by the defendant, running the factory himself through namke vasthe persons of his own." In this tax reference we are not concerned with the further course of the proceedings in that suit. As a result of the above litigation the Income-tax Officer, Karaikudi, issued notices under section 34(1)(a) of the Act to the assessee on March 27, 1953, for reassessment of the in....
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....e Appellate Assistant Commissioner was that the assessee's share income could not be determined or computed by way of reassessment without a reassessment of the firm itself determining the total income of the firm. We have already stated that in respect of the assessment year 1944-45 there were no section 34 proceedings at all against the firm and, consequently, there was no reassessment of the firm's income for that year. In respect of the other years 1945-46, 1946-47 and 1947-48 reassessments on the firm were made only on February 28, 1955, while the reassessments of the assessee's share income in respect of his individual assessments were made earlier, namely, on July 31, 1953. This contention was not accepted by the Appellate Assistant Commissioner. A plea of limitation was also raised before the Appellate Assistant Commissioner but that also was repelled. It was observed by the Appellate Assistant Commissioner that even if the proceedings under section 34 started against the assessee were invalid for one reason or other, the orders of reassessment can be justified as it would fall within the power of the Income-tax Officer under section 35(5) of the Act. This is....
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....lled by the Tribunal in these terms: "His contention is that the assessments were made out of time, i.e., beyond the four years limit, and that eight year rule cannot apply because the assessee did not conceal any particulars but actually wanted to be assessed on his share of income from the firm. In our opinion there is no force in this objection because the case is governed by the present section as modified by the amendment in 1948...In our opinion, the case is quite clearly governed by section 34(1)(a) because the correct share income of the assessee escaped assessment by reason of the omission or failure on the assessee's part to disclose fully and truly all material facts necessary for his assessment. The assessee failed to disclose the correct state of affairs namely that he was entitled to a half share in the entire income from the factory and that he was disputing the claim of the lessee Palaniappa Chettiar. The assessee cannot be heard to say that he was not aware of Palaniappa Chettiar's claim at the time of completion of the original assessment because even on the 6th April, 1948, he had questioned the validity of the lease in the suit notice g....
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.... 1953, would be barred by limitation if the department were to treat the case of the assessee as falling within clause (1)(b). The assessment years are 1944-45, 1945-46, 1946-47 and 1947-48, and it is obvious that even with reference to the last of the assessment years the period of four years, if the case is one within section 34(1)(b), lapsed on March 30, 1952. Mr. S. Ranganathan, learned counsel for the department, made it quite plain that the proceedings would be time-barred if they did not fall within section 34(1)(a). Now this sub-section cannot operate unless there be an omission or failure on the part of the assessee to make return under section 22 or to disclose fully and truly all material facts necessary for his assessment. This is an essential condition to the exercise of jurisdiction by the Income-tax Officer when proceedings are started beyond four years from the relevant assessment year and when they are sought to be brought within the compass of section 34(1)(a). The foundation of a proceeding under this clause is the suppression by the assessee of material facts necessary for assessment. In the collocation of the words of the statute it seems to us that the omis....
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....e computation of the income. He is not expected to do more than this. He cannot delve into the mind of the Income-tax Officer and try to fathom it and predicate what are material facts in the view of the officer. The facts must be such that if taken into account, they would have an adverse effect on the assessee by the passing of a greater assessment than the one actually made. The rule of full and true disclosure of material and necessary facts should not be so fastidiously construed as would enable the department to say that non-disclosure of a fact which may have a remote bearing on the assessment attracts the section, as the assessing officer would have material use of it to charge the assessee more than what he did. The Income-tax Officer cannot certainly fall back on the section to make good his deficiencies in the first completed assessment. Cases sought to be brought within section 34(1)(a) should strictly fall within that provision and it is for the department to show that the necessary conditions for the exercise of jurisdiction are fully present. The department is not at liberty to take hold of any and every circumstance, call it non-disclosure of material facts and set ....
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....ave discharged his duties properly and that he should be suitably prompted by the Karaikudi officer? In our opinion it cannot be said that the assessee was acting irrationally in presuming that the share income of the firm would have been properly determined by the competent officer. The assessee has done all that he need or could do and there is not an iota of evidence to charge him with non-disclosure of material facts in terms of section 34(1)(a). The finding of the Appellate Tribunal that the assessee failed to disclose the correct state of affairs, namely, that he was entitled to a half share in the income from the firm is not supported by learned counsel for the department. It is now admitted that the Income-tax Officer, Karaikudi, was well aware of the fact that the assessee had a half share in Viswanatha Ginning Factory. We have already stated that it was unnecessary for the assessee to have referred to the disputed lease in favour of Palaniappa. That was not a material fact necessary for the assessments. The finding of the Tribunal that there has been a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment is not....
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....within the meaning of sub-section (1) of section 35. It is now settled law that section 35(1) would not enable the department to rectify the individual assessment of a partner based upon the assessment of the firm as it cannot be said that there is any mistake apparent from the record of the assessment by reason of the assessment on the firm which is not part of that record. This has been laid down in Lakshminarayana Chetty v. First Additional Income-tax Officer, Nellore [1956] 29 I.T.R. 419, 424, where Subba Rao C.J., as he then was, observed as follows: "The mistake is not in the record but by a subsequent assessment of the firm, it was discovered that the earlier assessment was wrong to the extent of the assessees' share in the firm. It is not a mistake apparent from the record but a mistake discovered from the disposal of another case." This observation of the learned Chief Justice has been quoted with approval by the Supreme Court in Income-tax Officer v. S.K. Habibullah [1962] 44 I.T.R. 809 (S.C.). It is also now clear by reason of decisions of the Supreme Court that section 35(5) which acquired force only on and from April 1, 1952, has no retrospective ope....
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....e matter was taken up by the department to the Supreme Court by way of an appeal. It must be noted that in this case the assessments on the firm were made only after April 1, 1952. The Supreme Court following the principle laid down by it in Habibullah's case [1962] 44 I.T.R. 809 (S.C.) held that even in a case where the firm is assessed after April 1, 1952, section 35(5) cannot be resorted to. At page 612 Hidayatullah J. observed thus: "In S.K. Habibullah's case [1962] 44 I.T.R. 809 (S.C.) the assessments of the partners as well as of the firms were completed before April 1, 1952, and the amended provision was not held applicable. Here, the original assessment was made before the amendment, and to that assessment the amended provision cannot still be made applicable for the reasons to be given by us, even though the assessments of the firms were after April 1, 1952. The assessment of the respondents was a final assessment before April 1, 1952, and sub-section (5) has not been made applicable to such assessment, either expressly or by implication. It has been given a limited retrospectivity from April 1, 1952, and it was held by this court in the cited case that it....