TaxTMI 
TaxTMI 
1989 (9) TMI 48
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....come for the said assessment year, requiring him to file a return as he had reason to believe that certain income chargeable to tax for the said year has escaped assessment within the meaning of section 147(b) of the Act. The reasons for the reopening of the said assessment were sought for, but before the same were communicated, this writ petition was filed challenging the validity of the said notice on the grounds, inter alia, that there was no information which could have induced a reasonable belief in the Income-tax Officer that income had escaped assessment in the hands of the petitioner for the assessment year 1983-84. Petitioner's affidavit : The relevant averments as culled out from the affidavit filed in support of the petition are that the assessee-petitioner had known Rashid Shapoor Chenai (R. S. Chenai) who died in the year 1963 leaving his widow, Freny Rashid Chenai (F. R. Chenai), and the only son, Shapoor Chenai. They were friends. Till the demise of R. S. Chenai, how ever, the petitioner was not looking after their taxation matters. His son, Shapoor Chenai, also died in 1965 leaving the widow of the late R. S. Chenai and the widow of Shapoor Chenai with a young so....
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.... proceedings are, therefore, void. The Income-tax Officer himself had no reason to believe that any income escaped assessment. The Income-tax Officer seems to think that because of the advocate-client relationship existing between the assessee and Mrs. F. R. Chenai, the sum paid must be regarded as income from profession. In the absence of any evidence to the effect that the real character of the gift was professional fees, it is not open to the Income-tax Officer to treat the same as income from profession. Affidavit-in-opposition : The relevant counter averments made in the affidavit in opposition, inter alia, are that during the accounting year relevant to the assessment year 1984-85, the petitioner was in receipt of an amount of Rs. 6 lakhs in cash from Nawab Mir Barkat Ali Khan (known as "Nizam") on June 9, 1983, alleged to have been taken as loan. The loan was on unusual terms, viz., (1) loan without interest; (2) hand loan at the request of the petitioner ; (3) loan to be repaid according to the convenience of the petitioner, and (4) no repayment of the loan by the petitioner for a period of six years from June 9, 1983, and thereafter to be repaid as per the petitioner's con....
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.... a notice was issued calling upon him to file a return, which he did on April 4, 1988, which is the same as the original return. There was escapement of income and in view of the information subsequent to the assessment originally made, action under section 147(b) of the Act was initiated and the assessee cannot call for the reasons for issue of the notice under section 148. Recording of reasons for initiating action for reassessment are only administrative in character. There is no requirement in law that there should be a disclosure of the material to the assessee at that stage. Thus, the petitioner is not entitled to be given a copy of the reasons recorded by the Income-tax Officer for issue of a notice under section 148 of the Act along with or prior to the issue of the notice. It is further averred that the letter of confirmation addressed to the Income-tax Officer by Mrs. F. R. Chenai was obtained by the petitioner himself and forwarded to the Income-tax, Officer with his covering letter. The then Income-tax Officer did not in fact consider whether the amount of Rs. 5 lakhs being the face value of the 7% capital investment bonds, should be treated as professional receip....
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.... by the respondent-Income-tax Officer is denied. Such allegations ought not to have been made without impleading Sri P. R. Rao as party and behind his back. It is also averred that whether such a receipt in question would constitute income or not in the hands of the petitioner and whether the Income-tax Officer fell into error in inferring that the receipt would constitute income in the hands of the petitioner, may be legally tenable or untenable, but definitely it will not oust the jurisdiction of the Income-tax Officer to issue the impugned notice and, therefore, the allegation that the reassessment proceedings which are initiated are said to be without jurisdiction and ab initio void is unsustainable. Further, "discovery", in the context of section 147 of the Act, does not mean a conclusion of certainty at the stage of notice. Reply affidavit : In the reply affidavit, the assessee-petitioner, adverting to the allegation that the respondent came to know about the relationship of advocate and client subsequently by way of an audit report and his own enquiries, averred that there cannot be any greater lie than stating that the Income-tax Officer who completed the assessment for ....
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....th the writ petition at page 50. Even Mr. Palkhivala who argued these matters in the Supreme Court for three days was paid a fee of Rs. 20,000. One must be crazy to think that, in respect of matters argued by such an eminent counsel like Mr. Palkhivala, to whom a fee of Rs. 20,000 was paid, I would have been paid Rs. 5 lakhs. I regret to state that the imagination of the respondent is running riot. Without even verification of facts, he made deliberately false statements in the counter filed. If there is a grain of truth in what is stated by the respondent in his counter, I call upon him to place that information before this Hon'ble Court." Regarding the allegation that Sri P. R. Rao, Commissioner of Income tax, was not made a party to the writ petition, it is stated "it was not necessary for me to make the Commissioner, P. R. Rao, a party to the writ petition, because I did not allege any mala fides against him." Contentions : The rival contentions may now be adverted to. Sri Dastur, learned counsel for the petitioner, submits that the previous Incometax Officer who passed the assessment order was aware of all that was stated to be the reasons for issuing the impugned notice....
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....rt. The question in the main that falls for determination in this case is: "Whether the impugned notice has been validly issued ?" The above question has two-fold aspects, viz., (1) What are the ingredients that have to be satisfied by the Income tax Officer before exercising the power under section 148(1) read with section 147(b) of the Act ? (2) Whether, in this case, the said ingredients have been brought out ? Case law : Before answering, the legal position with reference to the case law may now be adverted to. In CIT v. Thakar Das Bhargava [1960] 40 ITR 301 (SC), the assessee, an advocate, who had been originally reluctant, agreed to defend certain accused persons in a criminal trial, on condition that he would be provided with the sum of Rs. 40,000 for a public charitable trust, which he would create. When the trial was over, the assessee was paid a sum of Rs. 32,000 and he created a trust of that amount by executing a trust deed. The question was whether the sum of Rs. 32,000 was the assessee's professional income. The Supreme Court held (headnote) : ". . . that on the facts, the proper legal inference was that the sum of Rs. 32,000 paid to the assess....
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....under article 226 of the Constitution has power to set aside a notice under section 147(b) of the Incometax Act, 1961, if the condition precedent to the exercise of the jurisdiction does not exist. The court may, in exercise of its powers, ascertain whether the Income-tax Officer had in his possession any information ; the court may also determine whether from the information the Income-tax Officer may have reason to believe that income chargeable to tax has escaped assessment. But the jurisdiction of the court extends no further. Whether, on the information in his possession, he should commence proceedings for assessment or reassessment, must be decided by the Income-tax Officer and not by the High Court. The Income-tax Officer alone is entrusted with the power to administer the Act : If he has information from which it may be said, prima facie, that he had reason to believe that income chargeable to tax had escaped assessment, it is not open to the High Court exercising powers under article 226 of the Constitution to set aside or vacate the notice for reassessment on a reappraisal of the evidence. In a petition under article 226 of the Constitution, the taxpayer may challenge ....
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....come-tax Act, 1922, is applicable not only where the income has not been assessed owing to inadvertence or oversight or owing to the fact that no return has been submitted, but also where a return has been submitted but the Income-tax Officer erroneously failed to tax a part of the assessable income. In CIT v. Narsee Nagsee and Co. [1960] 40 ITR 307 (SC), interpreting the words 'profits escaping assessment' in section 14 of the Business Profits Tax Act, 1947, this court held that those words apply equally to cases where a notice was received by the assessee but resulted in no assessment, underassessment or excessive relief and to cases where, due to any reason, no notice was issued to the assessee and there was no assessment of his income. Kapur J., speaking for the majority of judges in that case, observed (at page 312 of the report) that it is well-settled that an income escapes assessment when the process of assessment has not been initiated as also in a case Where it has resulted in no assessment after completion of the process of assessment. The true scope of the expression 'escaped assessment' in section 11A came up for consideration before this court in Ghanshyamdas v. Regio....
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....d "information" within the meaning of section 34(1) of the Act, the Supreme Court held (at p. 379) : "The first question arising in this case is whether the proceeding under section 34 is legally valid. It was contended by Mr. Narasaraju that the decision of the Privy Council could not be said to be definite information within the meaning of the section. It was said that the Income-tax Officer was fully aware of the circumstances of the case and the assessee had placed all the relevant facts before him, namely, that under the High Court's judgment the vendor was only entitled to one-third share of the income, pending the decision of the appeal before the Privy Council. In our opinion, there is no justification for this argument. It is not true to say that the assessee brought all the relevant facts before the Income-tax Officer. On the contrary he deliberately suppressed the fact that there was a compromise between himself and the plaintiffs under which he was entitled to the whole of the income from the mill. At any rate, the Privy Council's decision which determined the rights of the parties irrespective of the compromise did constitute definite information within the meaning ....
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....sight, inadvertence or a mistake committed by the Income-tax Officer. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority ; (3) where the information is derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment; (4) where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law." Dealing with the scope of section 147(b) of the Act in Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996, the Supreme Court held (headnote): "Held, that the opinion of the audit party on a point of law could not be regarded as 'information' enabling the Income-tax Officer to initiate reassessment proceedings under section 147(b). The Income-tax Officer had, when he made the original assessment, considered the provisions of sections 9 and 10 of the Indian Income-tax Act, 1....
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...., that the view of the internal audit party could be said to be information for the purpose of section 147(b), and that the assessment orders of the Income-tax Officer showed that the Income-tax Officer never applied his mind to the question and was blissfully unaware of the limit of Rs. 5,000 prescribed by section 37(2) of the Act in regard to 'expenditure in the nature of entertainment expenditure'. Therefore, the proceedings under section 147 (b) of the Act were legal and valid." In S. B. (House and Land) Pvt. Ltd. v. CIT [1979] 119 ITR 785, Sabyasachi Mukharji. J. (as he then was), speaking for a Division Bench of the Calcutta High Court, held (headnote): "...the first essential for an action under section 147(b) is that there should be belief that income has escaped assessment. The next requirement is that such belief must be formed in consequence of information. Such information must have reasonable nexus to the opinion that income has escaped assessment or has been underassessed. The information may be from an internal or external source. In the instant case, there was information that the original assessment might have been wrong and the Income-tax Officer re-examined....
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....ection 34 of the Act of 1922 at one time before its amendment in 1948 are not there in section 147 of the Act of 1961 would not lead to the conclusion that action can now be taken for reopening the assessment even if the information is wholly vague, indefinite, farfetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence." A Division Bench of the Allahabad High Court in Smt. Sarla Devi V. CED [1976] 103 ITR 652, held (headnote) : ". . . it was apparent that, at the time of the original assessment, the examination was whether the deceased was the sole surviving coparcener, so that his entire share would pass by succession. Subsequently, the Assistant Controller found that for the purpose of determining the share of the deceased in the coparcenary properties under the Act, a partition is deemed to have taken place on the date of his death for estate duty purposes. He also found that on such a partition, the wife of the deceased would not have got a share, because there was no son. Under the Hindu law, the wife gets a share where there is a partition between the father and sons and not otherwise. Therefore, the sh....
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....t towards investment in shares, the interest payments should be apportioned between dividend income and business income instead of accepting the assessee's claim for deduction of the entire interest payment against business income alone. On the basis of this information, the assessment was reopened under section 147(b) and the amount of dividend income assessable was reduced by certain amounts while the business income was enhanced by similar amounts, so, however, that the total assessable income was not disturbed. The reassessment was ultimately confirmed by the Tribunal. On a reference to the High Court at the instance of the assessee : Held, that, in view of the finding of the Tribunal that the Income-tax Officer did not have knowledge when he completed the original assessment of the diversion of the borrowed money for investment in shares, the report of the audit party that a portion of the borrowed moneys had been utilised for investment in shares would constitute information coming to the possession of the officer subsequent to the original assessment in consequence of which he entertained the belief that the income had escaped assessment and hence the reassessment was jus....
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....s income. It was not the object of the circular to express an opinion, for no such opinion was called for. Once the Supreme Court had pronounced upon the matter, the question was, in the absence of subsequent overriding legislation concluded and the opinion of any other person, whether of the Central Board of Direct Taxes or of any other agency, was of no relevance. While the Income-tax Officer should not be influenced by the opinion of the Board or the audit party, he was entitled to act on the information communicated to him. The Income-tax Officer had to act in a quasi-judicial capacity and he must, therefore, act independently and on the strength of the information available to him. The mere fact that the circular contained, apart from the information, the opinion of the writer, would not by itself make the information invalid or unacceptable, provided it was separable from the opinion. Therefore, the reopening of the assessment under section 147(b) was valid." In Punjab Produce and Trading Co. Ltd. v. CIT [1986] 158 ITR 524, the Calcutta High Court held (headnote) : "Where the Income-tax Officer completed the original assessment by applying the provisions of sections 70 ....
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....stern Newspaper Society's case [1979] 119 ITR 996 (SC) is at variance with several of the decisions of the Supreme Court, it would be appropriate if the impact of the said decision is considered vis-a-vis the earlier decisions of the Supreme Court relevant in this behalf and also in the light of the principle postulated under judgment per incuriam. In Anandji Haridas and Co.'s case [1968] 21 STC 326, a Bench of the Supreme Court comprising five learned judges, though it was concerned with section 11A of the Central Provinces and Berar Sales Tax Act, nevertheless, while dealing with the expression "escaped assessment", approved the principle and ratio laid down in Maharaj Kumar Kamal Singh's case [1959] 35 ITR 1 (SC), Sir Kameshwar Singh v. State of Bihar [1959] 37 ITR 388 (SC) and CIT v. Thakar Das [1960] 40 ITR 301 (SC). The relevant observation is as under (at page 335 of 21 STC) : "It is true that the said decisions, Maharaj Kumar Kamal Singh[1959] 35 ITR 1 ; Sir Kameshwar Singh [1959] 37 ITR 388 ; Narsee Nagsee and Co. [1960] 40 ITR 307 and others, were given with reference to either section 34(1) of the Income-tax Act or section 14 of the Business Profits Tax Act, but so....
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....ggesting the contrary do not, we say with respect, lay down the correct law." The aforesaid observation in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC) does not appear to be in conformity with the ratio laid down either in Maharaj Kumar Kamal Singh's case [1959] 35 ITR 1 (SC) or CIT v. A. Raman and Co. [1968] 67 ITR 11 (SC). In A. Raman and Co.'s case, it is laid down (headnote) : "The expression 'information' in the context in which it occurs (in section 147(b) of the Income-tax Act, 1961), must mean instruction or Knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment. To commence the proceedings for reassessment it is not necessary that on the materials which came to the notice of the Income-tax Officer, the previous order of assessment was vitiated by some error of fact or law ... That information must, it is true, have come into the possession of the Income-tax Officer after the previous assessment but even if the information be such that it could have been obtained during the previous assessment from an investigation of the material on record, or the facts disclo....
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....ing from the same principle-converge to the conclusion that decision once rendered must later bind like cases. We do not intend to detract from the rule that, in exceptional instances, where by obvious inadvertence or oversight a judgment fails to notice a plain statutory provision or obligatory authority running counter to the reasoning and result reached, it may not have the sway of binding precedent. It should be glaring case, an obtrusive omission. No such situation presents itself here and we do not embark on the principle of judgment per incuriam." I am persuaded to accede to the submission of learned standing counsel for the Revenue that the judgments in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC), was rendered per incuriam inasmuch as an earlier decision by a larger Bench of the same court laid down a ratio at variance with the above case and if that decision had been brought to the notice of their Lordships, in all probability, it might have been followed or in case the court intended to differ, it was bound to refer the matter to a larger Bench. Likewise, the observation of the learned judges in the above case (at page 1004): "In our opinion,....
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....quence of information": (a) where information is as to the true and correct state of the law derived from relevant judicial decisions where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or mistake committed by the Income-tax Officer ; (b) the information from external source includes discovery of new important matters or knowledge of fresh facts which were not present at the time of the original assessment : (c) the information may even be obtained from the record of the original assessment from an investigation of the same, or the facts disclosed thereby, or from other enquiry, or research into facts or law ; (d) the knowledge may be acquired by the Income-tax Officer himself on further research and discovery of facts or law which has previously passed unnoticed. This knowledge may be from the Income-tax Officer's attention being drawn to it by some other agency. Where he is not conscious of the true position in law or the true facts in existence, he may reopen the assessment after acquiring knowledge of the same ; (e) that the information of the internal audit party could form the basis for the belief that....
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.... basis for the belief of the Income-tax Officer that the income had escaped assessment within the meaning of section 147(b), may now be set out. The relevant recitals of the trust deed: ". . . AND WHEREAS ever since the unfortunate demise of the settlor's husband in 1963 and of the settlor's only son in 1965, Sri Y. V. Anjaneyulu, the settlor's personal welfare; AND WHEREAS owing to the personal qualities of head and heart of the said Anjaneyulu and the abundance of love, care and attention that the said Anjaneyulu, his wife and children have bestowed on the settlor over the above period, the settlor has developed abounding affection and regard for the said Anjaneyulu, his wife and children : AND WHEREAS on account of her love and affection for the said Anjaneyulu, his wife and children and in appreciation of the personal qualities of the said Anjaneyulu, his wife and children and also owing in particular to the personal esteem, regard and veneration which the settlor has for the said Anjaneyulu in looking after the personal welfare of the settlor, the settlor is desirous of settling in the manner hereinafter appearing the 7% Capital Investment Bonds of the total value ....
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....etion of assessment, I have reason to believe that income chargeable to tax has escaped assessment for the assessment year 1983-84. The assessment is, therefore, reopened under section 147(b) by issue of notice under section 148. Issue notice under section 148 for the assessment year 1983 immediately. Sd/ ...... 8-3-1988." Since there is a reference to the audit report in the said order sheet, the same may be referred to: "Review Audit by Income-tax Officer (I. A.) to the Inspecting Assistant Commissioner (Audit): (Shri Y. V. Anjaneyulu, Hyderabad-Assessment year 1983-84). The assessment for the assessment year 1983-84 of Shri Y. V. Anjaneyulu, then advocate, now High Court judge, was completed by the Income-tax Officer on November 5, 1983, on a total income of Rs. 2,48,258. This assessment was audited by the I. A. P. and R. A. P. also. However, there is a possibility of review audit by RAP since a major audit objection is being raised for the assessment year 1985-86. Similar issue as in 1985-86 is involved in this assessment as well. Shri Y. V. Anjaneyulu was representing since long time income-tax, wealth-tax and estate duty assessments of late Rasheed Shapoo....
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.... attention of the Income-tax Officer to the interpretation of the correct law on the facts as pronounced by courts. Sd......... ITO (IA) 2-2-1987." The power which has been exercised by the Income-tax Officer was under section 147(b) of the Act and, therefore, the same be set out: "147. If-. . . (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 chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned." Before the process of adjudication is commenced, it may be observed that the writ petition has been hastily filed without even awaiting the reasons sought for, for issuing the impugned notice. After receipt of the impugned notice on March 15, 1988, the reasons were sought for by the petitioner by his communication dated April 2, 1988, and thereafter without waiting for a reasonable period....
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....nd Co.'s case [1976] 102 ITR 287 (SC), Krishna Menon's case [1956] 29 ITR 954 and K. George Thomas' case, thereafter, a notice under section 148 was issued. Most of the material mentioned in the review audit dated January 28, 1987, extracted above, has its basis in the order sheet. However, at the end of the review audit, it is stated "the Income-tax Officer may be directed to take action under section 147(b) by citing the four Supreme Court cases referred to above, as information for forming a belief to reopen the assessment". But, underneath the same, the Income-tax Officer (1A) by his endorsement dated February 2, 1987, stated that as per the Supreme Court decision in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC), the audit party does not possess the power to pronounce on the law, but it may draw the attention of the Income-tax Officer regarding the interpretation of the correct law on the facts as pronounced by courts. Though there is no further material as to how this was communicated, the fact remains that it was clarified by the endorsement of the Income-tax Officer (1A) dated February 2, 1987, by which the effect of the last sentence of the review a....
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....reful and closer investigation. On appeal to the Supreme Court: Held, affirming the decision of the High Court, that the reassessment under section 34(1)(b) was valid in law inasmuch as the Income-tax Officer proceeded on the basis of information which came to him after the original assessment by fresh facts revealed in the assessment proceedings for 1958-59. The word 'information' in section 34(1)(b) is of the widest amplitude and comprehends a variety of factors. Nevertheless, the power under section 34(1)(b), however wide it may be, is not plenary because the discretion of the Income-tax Officer is controlled by the words 'reason to believe'. Information may come from external sources or even from the materials already on record or may be derived from the discovery of new and important matters or fresh facts. Section 34(1)(b) would apply to the following categories of cases: (1) where the information is as to the true and correct state of the law derived from relevant judicial decisions ; (2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer ; (3) wher....
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....as taxable income, and was nonetheless so because it was carried on without the motive of producing an income ; (iii) that the teaching of Vedanta by the appellant was the carrying on of a vocation by him and that the imparting of the teaching was the causa causans of the making of the gifts by L, that it was impossible to hold that the payments to the appellant had not been made in consideration of the teaching imparted by him, and that, therefore, the payments were income arising from the vocation of the appellant; (iv) that as the payments made by L were income arising from vocation, they were not casual or non-recurring receipts and no question of exemption under section 4(3)(vii) of the Indian Income-tax Act arose. In order that a payment may be exempted under section 4(3)(vii) of the Indian Income-tax Act, as a casual and non-recurring receipt, it has to be shown that it did not arise from the exercise of a vocation." (3) K. George Thomas' case, wherein it is held : "The assessee carried on avocation of preaching against atheism. In the course of such vocation and for the purpose of the same, he received the amounts in question as donation for the furtherance o....
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....8, 1987, as well as the "order sheet" dated March 8, 1988, that the assessee was representing since long time, income-tax, wealth-tax and estate duty assessments of the late R. S. Chenai and his family members. The statement of details of fees filed along with the writ petition shows only the fees received from April 1, 1978 onwards with reference to the assessment years 1979-80 to 1983-84. R. S. Chenai died in 1963 and his son died in 1965. On the basis of the information which the Income-tax Officer is said to be having, as stated in the order sheet, that there existed a relationship of "advocate and client" since a long time and nearer in point of time to the reduction in considerable amount in estate duty matters and, therefore, the mere fact that some fee has been received may not be, according to the Income-tax Officer, the full consideration which is otherwise said to be camouflaged in the form of trust. What we are concerned with in this writ petition which is limited in its scope, is whether the Income-tax Officer, in view of this information, has reason to believe that certain income has escaped assessment. The notice which has been given under section 148 is in the natur....
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....by itself make the information invalid or unacceptable, provided it was separable from the opinion. Therefore, the reopening of the assessment under section 147 (b) was valid." The Calcutta High Court in Punjab Produce and Trading Co. Ltd. v. CIT [1986] 158 ITR 524 held (headnote) : "Where the Income-tax Officer completed the original assessment by applying the provisions of sections 70 to 74 of the Income-tax Act, 1961, in a particular way and subsequently the Revenue audit party expressed contrary opinion regarding the interpretation of these provisions and the Income-tax Officer initiated proceedings under section 147(b) on the basis of such interpretation : Held, that the reassessment proceedings had not been validly initiated." The above three cases are in line with the decisions laid down by the Supreme Court in Maharaj Kumar Kamal Singh's case [1959] 35 ITR 1, A. Raman and Co.'s case [1968] 67 ITR 11 and Kalyanji Mavji and Co.'s case [1976] 102 ITR 287, which had received the approval in Anandji Haridas and Co.'s case [1968] 21 STC 326. From the foregoing, it is evident that the Income-tax Officer has, on the basis of the information, reason to believe that th....
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....ressure and administrative instruction of Sri P. R. Rao that the assessment in question has been reopened by the respondent-Income-tax Officer without the application of his own mind and, therefore, the claim that the whole proceedings deserved to be quashed is untenable and unsustainable both legally and factually. I may respectfully and humbly add at this stage that the wild allegations made against the Commissioner Sri P. R. Rao, ought not to have been made without impleading him as a party and behind his back. This will be a valid ground for dismissing the writ petition for not impleading the proper and necessary party." In the reply affidavit, the petitioner averred as under: "As regards the respondent not applying his own mind, I reiterate my plea already urged in the writ petition. In the nature of things, some matters cannot be proved especially if the Tax Officers want to conceal the correspondence placing them in confidential folders beyond the reach of the courts. I have valid reasons to think that the assessment was reopened by the respondent without application of his own mind and under the directions from the Commissioner. The respondent refers to my 'stature an....
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.... an investigation of the material on the record, or the facts disclosed thereby, or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected." It is, therefore, irresistible to conclude that the Income-tax Officer had come to be possessed of information after the previous assessment, which formed the basis for his belief that there was escapement of income ; and it is not only relevant but has rational nexus with the said belief. The said belief, therefore, is formed independently and not dependent on any pressures and influences as alleged. Supplemental counter-affidavit-whether to be taken into consideration : The objection by the petitioner in respect of the Supplemental counter-affidavit filed on behalf of the Revenue by Sri Dayanand, Income-tax Officer, to the effect that this Income-tax Officer had nothing to do with the impugned notice and, therefore, without obtaining permission of this court under rule 12 of the Writ Proceeding Rules, could not be entertained and much less be accepted, need not detain us long inasmuch as the said counter need not be taken cognisance of, as nothing turns up....
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.... petitioner for the assessment year 1983-84 on the ground that he has reason to believe that the income has escaped assessment within the meaning of section 147 of the Act. The petitioner, Shri Anjaneyulu, before his elevation to the Bench of this court in November, 1983 (since retired on 10-11-1988), was a leading tax lawyer in the State. For the assessment year 1983-84, the petitioner returned a gross income of Rs. 2,57,571 and after claiming statutory deductions, the net income returned was Rs. 2,40,245. One of the items on which the petitioner claimed deduction was a sum of Rs. 13,000 representing interest on 7% capital investment bonds of the face value of Rs. 5,00,000 received from the trustees of "Anju Family Trust". The trust was created by one Mrs. F. R. Chenai, an old lady aged about 80 years, who is a close family friend and well-wisher of the petitioner and members of his family. She created the trust for the benefit of the petitioner, his wife, his son and four daughters. The corpus of the trust was 7% capital investment bonds of the value of Rs. 5,00,000. Mrs. K. S. Chenai, the widowed daughter-in-law of the settlor, and Mr. Ratnakar, the son of the petitioner, are th....
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....lief in the respondent that income chargeable to tax has escaped assessment. The details of the fees received by the petitioner from the Chenai family relevant for the assessment years 1979-80 to 1983-84 have been filed as enclosures to the writ petition. The trust was created due to the personal goodwill prevailing between the two families. Although the petitioner protested at the move of Mrs. Chenai to set up the trust, because of the abundant goodwill and affection she had towards the petitioner, who was almost like a son to her, and the other members of his family, she insisted upon creating the trust. According to the petitioner, late Rashid Shapoor Chenai, the husband of the settlor, and he were great personal friends but during the lifetime of late Rashid Shapoor Chenai, he did not look after the matters relating to their estate. It was only after the death of Chenai's son in 1965, that he had to look after the welfare of the old lady and her daughter-in-law and the grandchild. The impugned notice was issued without application of mind. It is also alleged by the petitioner that he understands reliably and believes it to be true that under the specific direction of Sri P. R. ....
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....in the counter that "it has subsequently come to the knowledge of the Department that Mrs. Chenai has been a client of the petitioner" and he has appeared in several cases on her behalf. Admitting the fact that the petitioner had brought to the notice of the previous Income-tax Officer at the time of the assessment the creation of the trust, it is averred in the counter that the previous officer was not in the know of the real nature of the transactions and the circumstances that gave rise to the execution of the trust by Chenai's family. The respondent came to know through the information subsequently obtained by him "by way of audit report and his own enquiries" that the whole transaction was the result of professional services rendered by the petitioner to Chenai's family. Denying the allegations that the impugned notice was the result of non-application of mind and pressure applied by the Commissioner of Income-tax, the respondent pleaded in the counter-affidavit that "there is no record containing the correspondence that passed between Sri P. R. Rao, the Commissioner of Income-tax, on the one hand, and myself and my predecessor, on the other". A reply affidavit was filed by....
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....sements made thereon. On the second day of the hearing, a second counter-affidavit sworn to by Sri B. R. Dayanand, Income-tax Officer, Salary Ward 4(3), Hyderabad, was filed giving out some other details of the professional advice said to have been rendered by the petitioner to the Chenai family. In this second counter, inter alia, it is averred that due to the advice tendered by the petitioner to the Chenai family, half share in a residential house, named Shapoor House, was transferred by Mrs. Chenai in favour of her grandson "without attracting capital gains tax, possible estate duty (as she was aged about 78 years) and also gift-tax". Certain new grounds also are mentioned in this affidavit alleging that the worthy tax planning resorted to by the Chenai family was because of the advice rendered by the petitioner in his capacity as a tax consultant. A further averment made in this second counter is that the respondent came into possession of "a fund of further and fresh information"-"from external sources subsequent to the completion of the original assessment-". Taking strong objection to the filing of the second counter-affidavit, contending that it was bereft of bona fid....
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....e and children and in appreciation of the personal qualities of the said Anjaneyulu, his wife and children and also owing in particular to the personal esteem, regard and veneration which the settlor has for the said Anjaneyulu in looking after the personal welfare of the settlor, the settlor is desirous of settling in the manner hereinafter appearing the 7% Capital Investment Bonds of the total value of Rs. 5,00,000 (Rupees five lakhs only) above referred to for the benefit of the said Anjaneyulu, his wife and children, who, for brevity's sake, are hereinafter referred to as "THE SAID BENEFICIARIES" and more fully described in Schedule I given hereinunder." Order Sheet: 1983-84: "Justice Shri Y. V. Anjaneyulu. The assessment for the assessment year 1983-84 of Shri Y. V. Anjaneyulu, then advocate and now High Court Judge was completed on November 5, 1983, on a total income of Rs. 2,48,258. As per the copy of the declaration of trust dated August 27, 1982, the assessee's client Mr. Freny Rashid Chenai w/o. late Shri Rashid Shapoor Chenai had created a trust in favour of the assessee and his family members to the extent of Rs. 5 lakhs. I have come to know now from enquiries ....
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....e a major objection is being raised for the assessment year 1985-86. Similar issue as in 1985-86 is involved in this assessment as well. Shri Y. V. Anjaneyulu was representing since long time the income-tax, wealth-tax and estate duty assessments of late Rashid Shapoor Chenai and his family members. He was solely responsible for reduction of huge estate duty liability of both the late R. S. Chenai and his son's estate and similarly he has been representing the legal heirs of both father and son, viz., Mrs. Freny Rashid Chenai and Mrs. Kursheed Shapoor Chenai. The assessee's son purchased a site in Shapoorwadi and constructed a building when he was representing the estate duty cases before the lower courts. In view of the substantial reduction gained by the effective representation of Shri Y. V. Anjaneyulu, the wife of late Rasheed Shapoor Chenai, instead of the payment of professional fees, preferred to create a trust in favour of Shri Y. V Anjaneyulu and his family members to the extent of Rs. 5,00,000 at his instance. This is also a device adopted by the assessee to escape proper taxation in his hands. The advocate and client relationship is there beyond any shadow of doubt since....
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....xpressing opinion on the law. No new facts or circumstances had come to the notice of the respondent warranting reopening of assessment ; change of opinion with regard to the same material would not amount to valid exercise of power and, therefore, the notice impugned must be quashed. There is no rational connection between the material adverted to in the reasons recorded and the formation of the opinion and, therefore, in the absence of strict compliance with the statutory conditions adumbrated in section 147(b), the exercise of power is vitiated. The respondent's failure to produce the record concerning the so-called enquiries claimed to have been made before issuing the impugned notice vitiates the notice impugned. The second counter filed by Sri Dayanand, Income-tax Officer, seeking to support the action for issuing the impugned notice must be ignored totally since it refers to matters which are neither part of the audit report nor of the reasons recorded in the "order sheet". The trust not being a reward for the professional services rendered by the petitioner to the Chenai family, the proposed action to treat the same as professional income which has escaped assessment has no....
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....cause of the omission or failure on the part of the assessee to file a return or failure to disclose true and full material facts necessary for the assessment. Even if there is no omission or failure on the part of the assessee, still the Income-tax Officer has jurisdiction to make reassessment under section 147(b) if he has reason to believe, in consequence of information in his possession, that there has been escapement of assessment in respect of the income chargeable to tax. Section 148(1) obligates the Income-tax Officer to issue notice in all cases pertaining to escapement of assessment falling within the ambit of section 147. Before issuing such notice, the Income-tax Officer is required by section 148(2) to record his reasons. valid exercise of power under section 147(b) postulates that: (1 ) the information obtained must be subsequent to the previous assessment; and (2) such information must validly constitute the basis for the reason to believe that income chargeable to tax has escaped assessment. The phrase "reason to believe" occurs in both clauses (a) and (b) of section 147. Section 147(a) was considered by the Supreme Court in ITO v. Lakhmani Mewal Das [1976] 103 I....
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....e information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence." Dealing with the powers of the Income-tax Officer to reopen the assessment, the learned judge ruled (at page 448) : "The powers of the Income-tax Officer to reopen assessment, though wide, are not plenary. The words of the statute are 'reason to believe' and not 'reason to suspect'. The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action is taken, the requirements of t....
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....tribunals, there must be brought before the Queen's Bench not only the formal order of the tribunal but also, as the old writ said, 'all things touching the same' : and this includes the reasons for the decision when the tribunal gives them." After adverting to certain old rulings touching upon the issue of a writ of certiorari, The learned Law Lord further said (at page 445) : "Now, turning to modern cases, it will be seen that, in our day too, the courts have proceeded on the footing that there should be included in the record, not only the formal order, but all those documents which appear therefrom to be the basis of the decision-that on which it is grounded." The record produced before us at the time of hearing consists of, among other papers, "the order sheet" containing the reasons recorded and the audit report. The satisfaction reached by the respondent for coming to the conclusion that the trust amount of Rs. 5,00,000 was a professional receipt of the petitioner was claimed to be the result of the enquiries made by the respondent and the audit report as can be seen from paragraph 2 of the recorded reasons "I have come to know now from the enquiries and the audi....
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....he record of which the necessary ingredient is the "enquiries" claimed to have been made by him. The failure on the part of the respondent to produce this essential and relevant record leads me to infer that the satisfaction reached by him for holding that income has escaped assessment was based on the "enquiries" made by him, is merely pretence and that there is no genuine link between the formation of the opinion and the reasons stated to be the foundation for the opinion. The original assessment made by the previous officer on November 5, 1983, was under section 143(3) of the Act after considering the evidence produced by the petitioner. Along with the original return filed by the petitioner, he enclosed a covering letter in which he clearly mentioned about the trust and one of the items in respect of which he claimed deduction in the return filed by him related to an amount of Rs. 13,005 representing interest on 7% Capital Investment Bonds of the face value of Rs. 5,00,000 received from the trustees of the trust in question. The then Income-tax Officer sought clarifications from the petitioner in respect of certain items mentioned in the return including the interest claimed....
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....eduction of huge estate duty liability of late R. S. Chenai and his son's estate. He was also representing the legal heirs of both father and son . . . In view of the substantial reduction gained by the effective representation of Mr. Y. V. Anjaneyulu, the wife of late Rasheed Shapoor Chenai, instead of payment of professional fee, preferred to create a trust in favour of the petitioner and his family members." This is at best only a vague feeling or to give a most charitable interpretation, a belief entertained by the respondent without any basis. It is incumbent upon the respondent to "set out any material on the basis of which he had arrived at such belief so that the court could decide for itself whether there was any material on the basis of which the Income-tax Officer could reasonably entertain such belief." [See ITO v. Madnani Engineering Works Ltd. [1979] 118 ITR 1, 6.] The estate duty case regarding the Chenai family was argued, according to the petitioner in the High Court unsuccessfully by Shri P. Ramachandra Reddy, the former Advocate-General, and successfully in the Supreme Court by Shri N. A. Palkhivala. The Income Tax Reports in Khorshed Shapoor Chenai v. Asst....
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....age 296) : "On a combined review of the decisions of this court, the following tests and principles would apply to determine the applicability of section 34(1)(b) to the following categories of cases : (1) where the information is as to the true and correct state of the law derived from relevant judicial decisions; (2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority; (3) where the information is derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment; (4) where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law. If these conditions are satisfied then the Income-tax Officer would have....
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....ees paid to him for defending the accused persons in the Farrukhnagar case. Such a voluntary desire on the part of the assessee created no trust, nor did it give rise to any legally enforceable obligation ... The money when it was received by the assessee was his professional income, though the assessee had expressed a desire earlier to create charitable trust out of the money when received by him. Once it is held that the amount was received as his professional income, the assessee is clearly liable to pay tax thereon." In that view, the Supreme Court set aside the judgment of the High Court of Punjab. In George Thomas (K.) (Dr.) v. CIT [1985] 156 ITR 412 (SC), certain sums were received by the assessee as donations through the Indian Christian Crusade from his friends in the U. S. A., who believed in the cause which he sponsored and for helping the movement a movement for the spread of religion and for fighting the forces of atheism. The question was whether these amounts were assessable to tax. Confirming the decision of the High Court that the amounts were liable to tax, the Supreme Court held (at page 420) : "It has been established that the assessee was carrying on a vo....
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....8 (SC) was about as he did not know its citation. The only inference that must be drawn in the circumstances is that the respondent, without applying his mind, has recorded the reasons for reopening the assessment. As already noticed, except George Thomas' case [1985] 156 ITR 412 (SC) which was rendered by the Supreme Court in 1985 subsequent to the finalisation of the previous assessment, all the other cases referred to in the record of reasons, it cannot be said, were not in the know of the previous officer who finalised the assessment in 1983. The second officer was not even aware of what George Thomas' case [1985] 156 ITR 412 (SC) was about and he did not apply his mind as to how the cases mentioned in the audit report could form the basis for reopening the assessment. The previous assessment, as already noticed supra, was made after conscious application of mind and after considering the evidence including the trust deed and the confirmation letter submitted by the settlor. Neither the audit report nor the record of reasons discloses what was the information that came into the possession of the respondent subsequent to the previous assessment. His belief that there was such in....
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....tted, if the Income-tax Officer erroneously fails to tax a part of assessable income, it is a case where the said part of the income has escaped assessment. " Dealing with the jurisdiction exercisable under section 147(b), his Lordship Shah J. (as he then was), speaking for the court in CIT v. Raman and Co. [1968] 67 ITR 11 (SC) observed (headnote): "Jurisdiction of the Income-tax Officer to reassess income arises if he has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment. That information must, it is true, have come into the possession of the Income-tax Officer after the previous assessment but even if the information be such that it could have been obtained during the previous assessment from an investigation of the material on the record, or the facts disclosed thereby, or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected." After stating the rule, the court in that case examined the notice issued by the Income-tax Officer for reassessment and found that it suffers from a serious infirmity-it did not contain the re....
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....the earlier assessment order and he decides to adopt a different approach to the matter. Such a reopening is based on a 'mere' change of opinion and is without jurisdiction. The Income-tax Officer cannot reopen an assessment at his 'sweet will and pleasure'." In Kalyanji Mavji's case [1976] 102 ITR 287 (SC), while stating that, in the original assessment, if the income liable to tax had escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer, the assessment could be reopened and the assessee should not be allowed to take advantage of a mistake committed by the taxing authority (which is no longer good law in view of the rule stated in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC)), the Supreme Court quoted with approval the aforesaid statement of law laid down by the Bombay High Court. In CIT v. Dinesh Chandra H. Shah [1971] 82 ITR 367, the Supreme Court faulted the reopening of assessment under section 34(1)(b) on the ground that (headnote): "mere change of opinion could not be a valid ground for reopening an assessment under section 34(1)(b) of the Act." A vague feeling that certain transactions were not ge....
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.... the proposition thus (at page 681) : " . . it is not disputed that the present case is not one of information concerning the facts or particulars, but is one of information regarding instruction or knowledge as to law. That being so, unless the information as to law is received from a formal source, it cannot constitute an information within the meaning of section 147(b) so as to justify the Income-tax Officer to reopen the assessment. The Income-tax Officer framing the original assessment did not apply his mind to the legal aspect applicable to the facts which had been disclosed by the assessee and that being so, the successor-Income-tax Officer could not reopen the assessment on the pretext that he informed himself of the correct legal position from the assessment of the firm, which cannot be regarded as a formal source. It would only amount to a fresh look on the facts already on record and hence the proceedings were invalid." The respondent has not discovered any error in the view taken by the predecessor-officer but he only formed an opinion different from the one arrived at by the previous officer. The formation of the opinion has no nexus with the material disclosed i....
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....s the dicta in Kalyanji Mavji's case [1976] 102 ITR 287 (SC), must be treated as per incuriam. The ratio laid down in Anandji Haridas and Co. v. S. P. Kushare [1968] 21 STC 326 (SC) by a larger Bench of five judges was not noticed by their Lordships while rendering the decision in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC). Further, the statement of law in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC) at page 1004 that "an error discovered on a reconsideration of the same material and no more does not give him" (Income-tax Officer) the power to reopen cannot be supported on the basis of Maharaj Kumar Kamal Singh's case [1959] 35 ITR 1 (SC), A. Raman and Co.'s case [1968] 67 ITR 11 (SO) and Bankipur Club Ltd. v. CIT [1971] 82 ITR 831 (SC), although these three rulings were referred to by his Lordship Pathak J. (as he then was), speaking for the court, in support of the above proposition. I cannot agree. When a decision is rendered without noticing a binding precedent or an inconsistent statutory provision, it is per incuriam and, therefore, loses its efficacy as a precedent: except the parties to the lis it binds none. The applicatio....
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....st them under sections 10(3) and 11(4)(a) on account of their failure to furnish the returns. Similar notices were also issued for the period up to December 31, 1955. The assessees objected to the issue of notices on the ground that they were barred by time. Thereafter, fresh notices were issued on July 8, 1959, and the same were questioned. Section 11A conferred power on the Commissioner to make assessment or reassessment if he is satisfied that "in consequence of any information which has come into his possession" any turnover of a dealer has escaped assessment. His Lordship Hegde J., speaking for the majority, after referring to certain decisions of the Supreme Court that arose under the Income-tax Act, including Maharaj Kumar Kamal Singh's case [1959] 35 ITR 1 (SC) held (at page 337 of 21 STC): "In our judgment, the knowledge of the fact that the appellants had not submitted their quarterly returns as well as the treasury challans, constituted an information to the assessing authority from which it could be satisfied and in fact it was satisfied that the turnovers with which we are concerned in this case had escaped assessment." Anandji Haridas and Co.'s case [1968] 21 ST....
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....a radical change because of the later decision of the Privy Council. The opinion formed by the Income-tax Officer when the first assessment was made was based on the binding decision of the Patna High Court which was holding the field and when that decision was set aside on appeal by the Privy Council, it was incumbent upon the assessing authority to follow the Privy Council's decision. In CIT v. A. Raman and Co.[1968] 67 ITR 11 (SC), the discovery that income chargeable to tax had escaped assessment was made for the first time on considering the material. It was not a case of reconsideration of the available material. The expression "information", observed his Lordship, Shah J., in the above said case (at page 15) : "in the context in which it occurs must, in our judgment, mean instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment." It does not lay down that, on reconsideration of the same material, the assessing authority can reopen the assessment. It must also be mentioned in this context that the assessment order impugned in the above case was set aside on the ground that based....
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....y. Thus, where he is not conscious of the true position in law or the true facts in existence, he may reopen the assessment on acquiring knowledge of the same." In S. B. (House and Land) Pvt. Ltd. v. CIT [1979] 119 ITR 785, Division Bench of the Calcutta High Court, interpreting section 147(b) and following Kalyanji Mavji's case [1976] 102 ITR 287 (SC) and approvingly referring to Holck Larsen's case [1972] 85 ITR 467 (Bom), observed (at page 802) : "Therefore, if there is new knowledge or new information and such knowledge leads to a change of opinion, then, in our opinion, as was observed by the court in the case of CIT v. H. Holck Larsen [1972] 85 ITR 467 (Bom), that would not be a case of mere change of opinion but it would be a change of opinion supported by or in consequence of the knowledge received by the Income-tax Officer and such a change of opinion will not be outside the scope of clause (b) of section 147 of the Incometax Act, 1961. As, in this case, there was such an information or knowledge that the original assessment might have been wrong and the Income-tax Officer because of that information had to re-examine the facts of this case and formed the belief that....
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....n the assessment. It may be that the view taken on the interpretation of sections 70 to 74 is the correct view but it is not for the Revenue Audit Party to interpret the law." In Musasons (P.) Lid. v. CIT [1978] 111 ITR 47 (Mad) while making the original assessment, the Income-tax Officer adopted the sum assessable under the head "Dividends" as the gross amount of dividend, received by the assessee company. The audit party, while going through the file, noticed that a part of the amount borrowed by the assessee went into investment in shares. When notice was issued under section 147(b) for reopening of assessment, the same was challenged on the ground that what was pointed out by the audit party was not "information". The Madras High Court held (at page 49) : "it is not disputed before us that the entire borrowals were not utilised for the purpose of business and part of the borrowals was utilised for making investment. If so, if the dividends were assessed without deducting the interest referable thereto, it would inevitably follow that the ultimate tax payable on the total income was lower than the actual tax payable because the rate of tax payable on inter-corporate divide....
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.... information within the meaning of section 147 (b) of the Act." A circular issued by the Central Board of Direct Taxes on February 28, 1979, containing information regarding the decision of the Supreme Court in V. S. S. V. Meenakshi Achi v. CIT [1966] 60 ITR 253, which laid down that rubber replantation subsidy received by an assessee was income in his hands fell for consideration before a Division Bench of the Kerala High Court in CIT v. West Coast Industrial Co. Ltd. [1987] 168 ITR 72. The Income-tax Officer, on receipt of the circular, reopened the assessment. The assessee's objection was upheld by the Income-tax Appellate Tribunal based on the decision in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC). On a reference whether the reopening of the assessment was valid, the Division Bench held (at page 74) : "It is not the object of the circular to express an opinion, for no such opinion was called for. Once the Supreme Court has pronounced upon the matter, the question is, in the absence of subsequent overriding legislation, concluded and the opinion of any other person is of no relevance. Whatever opinion may have been expressed in the circular, whether i....
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....swar Rao, Incometax Officer, the second respondent herein, Shri Dayanand had nothing to do with the issue of notice. The information which Shri Dayanand seeks to place before this court by way of supplementary counter-affidavit, one day after the arguments were advanced by learned counsel for the petitioner, does not pertain to what was claimed to have been in existence when the impugned notice was issued under section 147(b) : It refers to what Shri Dayanand considers to be valid reasons for issuing the impugned notice. The assertions of Shri Dayanand in the supplemental affidavit that, because of the "meritorious services/advice given by the petitioner to the Chenai family, huge reduction/tax savings have resulted to the Chenai family," and that Mrs. F. R. Chenai transferred her half share in "Shapoor House" to Shri D. S. Chenai during the previous year relevant to the assessment year 1983-84 "without attracting capital gains tax, possible estate duty (as she was aged about 78 years) and also gift-tax," are totally incorrect. From the supplemental reply affidavit filed by the petitioner and copies of gift-tax assessment orders produced before us, it is clear that the Department l....
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....s a leading legal practitioner and he appeared in many matters for one Mrs. F. R. Chenai, an old lady who was a close family friend and well-wisher of the petitioner and the members of his family. She created a trust for the benefit of the petitioner called "Anju Family Trust" on August 27, 1982, and the same was registered. The corpus of the trust was 7% capital investment bonds of the value of Rs. 5,00,000. As per the trust deed, the petitioner is entitled to the income from the trust fund during his lifetime and after his demise, his wife will be entitled to the same. After the lifetime of his wife, the trust fund is to be divided into five equal shares and the trustees are required to deliver one equal part of the trust fund to each of the five children of the petitioner. Mrs. K. S. Chenai, the widowed daughter-in-law of the settlor and Mr. Ratnakar, the son of the petitioner are the trustees. The petitioner filed the income-tax returns for the assessment year 1983-84 showing a gross income of Rs. 2,57,571 and after claiming statutory deductions, the net income returned was Rs. 2,40,245. One of the items on which the petitioner claimed deduction was a sum of Rs. 13,000 represen....
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....ome-tax Officer who made the assessment on November 5, 1983, lost sight of the fact that the receipt of Rs. 5 lakhs is assessable as a "professional receipt". In view of the information received subsequent to the assessment originally made, action was initiated under section 147(b) of the Act. It is also stated that the previous Incometax Officer did not consider whether the amount of Rs. 5 lakhs should be treated as a professional receipt and, therefore, taxable income. It was denied that there was non-application of mind and that pressure was applied by the Commissioner of Income-tax to reopen the assessment. To this, a reply affidavit was filed by the petitioner stating that the previous Income-tax Officer, Mr. Waheed, completed three assessments of the petitioner under section 143 of the Act and scrutinised the returns and the statements and that he was fully aware of the relationship of advocate and client between the petitioner and the Chenai family and that for every case in which he appeared, he charged a decent fee. It is further stated that the benefit of huge reduction of estate duty was not due to his efforts but due to the efforts of Sri P. Ramachandra Reddy in the ....
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....n error, discovered after reconsidering the same material, does not give him that power. On behalf of the Department, Sri M. Suryanarayana Murty, learned standing counsel, contended that the information in the possession of the Income-tax Officer seeking to reopen the assessment need not be external to the record which constituted the basis for the previous officer, who passed the assessment order. That information may relate to other facts or law. In the instant case, the audit report constitutes by itself a valid information and, therefore, the impugned notice could validly be issued under section 147(b). Hence, the ingredients of section 147(b) are satisfied. He also further contended that the ratio laid down in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC) is per incuriam since it is contrary to the law laid down by the earlier larger Benches, particularly in Anandji Haridas and Co. P. Ltd. v. S. P. Kushare, STO [1968] 2l STC 326, a decision rendered by a Bench of five judges of the Supreme Court. My learned brother, Seetharam Reddy J., after considering the facts, the relevant documents as well as the various decisions cited, held that the informati....
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....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 chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year)." It is not in dispute that, in the instant case, the Income-tax Officer has exercised power only under section 147(b) of the Act. From a plain reading of the section, it is obvious that, for initiating action for reassessment, two conditions have to be satisfied, viz., (1) there should be information in his possession, and (2) as a consequence of such information, he has reason to believe that income chargeable has escaped assessment. What constitutes "information" is the subject-matter of decision of various courts. In CIT v. A. Raman and Co. [1968] 67 ITR 11, the Supreme Court took the view that (at page 16) : "Jurisdiction of the Income-tax Officer to re....
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.... the jurisdiction of the officer. It is then not for the High Court to determine whether the assessment should be reopened, for it is for the Income-tax Officer to administer the Act." Subsequent to this decision, the Supreme Court delivered two more decisions which are very significant. They are Kalyanji Mavji's case [1976] 102 ITR 287 (SC) and Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC). In Kalyanji Mavji's case [1976] 102 ITR 287, the Supreme Court laid down as follows (headnote) : "The word 'information' in section 34(1)(b) is of the widest amplitude and comprehends a variety of factors. Nevertheless, the power under section 34(1)(b), however wide it may be, is not plenary because the discretion of the Income-tax Officer is controlled by the words 'reason to believe'. Information may come from external sources or even from the materials already on record or may be derived from the discovery of new and important matter or fresh facts. Section 34(1)(b) would apply to the following categories of cases: (1) where the information is as to the true and correct state of the law derived from relevant judicial decision; (2) where in the original as....
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....l examination of the facts and on the application of the legal principle, he has passed the assessment order. On the very same facts and on the basis of the very same principles, the subsequent officer has revoked the assessment contrary to the principles laid down by various High Courts in respect of the scope of section 147 of the Act. It is also further contended that the officer had no information as a consequence of which it can be said that he had reason to believe that income chargeable to tax has escaped assessment. Learned standing counsel for the Income-tax Department, however, submitted that the Income-tax Officer who issued the notice had necessary information from the audit report and he was satisfied that, in the earlier assessment, the officer has not applied his mind and has not considered the legal principles and by mistake or inadvertence, he omitted to treat the trust amount as fees or consideration for his services rendered. He submitted that the decision in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC), is rendered Per incuriam and, therefore, an income which had escaped assessment due to oversight, inadvertence or mistake can be a grou....
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....1959] 35 ITR 48 and not in [1956] 29 ITR 954. In view of the information in my possession now, which is gathered after the completion of assessment, I have reason to believe that income chargeable to tax has escaped assessment for the assessment year 1983-84. The assessment is, therefore, reopened under section 147(b) by issue of notice under section 148. Issue notice under section 148 for the assessment year 1983 immediately." Review audit by Income-tax Officer (I. A.) to the Inspecting Assistant Commissioner (Audit): "(Shri Y. V. Anjaneyulu, Hyderabad-Assessment year 1983-84) The assessment for the assessment year 1983-84 of Shri Y. V. Anjaneyulu, then advocate, now High Court judge, was completed by the Income-tax Officer on November 5, 1983, on a total income of Rs. 2,48,258. This assessment was audited by the Internal Audit Party and Revenue Audit Party also. However, there is a possibility of review audit by Revenue Audit Party since a major audit objection is being raised for the assessment year 1985-86. Similar issue as in 1985-86 is involved in this assessment as well. Shri Y. V. Anjaneyulu was representing since long time income-tax, wealth-tax and estate duty....
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....party does not possess the power to pronounce on the law ; it, nevertheless, may draw the attention of the Income-tax Officer as to the interpretation of the correct law on the facts as pronounced by courts. Sd .......... I. T. O. (IA.)., 2-2-1987." It may be noted that the internal audit has also referred to four decisions of the Supreme Court, viz., Kalyanji Mavji's case [1976] 102 ITR 287, Krishna Menon's case [1959] 35 ITR 48 George Thomas' case [1985] 156 ITR 412 and Thakar Das Bhargava's case [1960] 40 ITR 301 and further appended Indian and Eastern Newspaper Society's case [1979] 119 ITR 996. These decisions have been practically reproduced in the order sheet. A careful examination of the order sheet shows that the "information" was that there was an advocate-client relationship between the petitioner and Mrs. Chenai, the settlor, and that the petitioner was solely responsible for reduction of huge estate duty liability of both the late R. S. Chenai and his son and the assessee's son purchased the site at Shapoorwadi and constructed a building and that in view of the substantial reduction gained by the effective representation of Sri Y. V. Anjaneyulu, the wife of....
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....tio laid down by the Supreme Court in the aforesaid cases is strictly applied to the facts of the instant case, section 147(b) of the Act is not attracted, inasmuch as all this information was present before the Income-tax Officer and he did not come into possession of any information, after the previous assessment. It is further submitted that, along with the original return, the petitioner-assessee enclosed a covering letter, in which he mentioned about the trust. The Income-tax Officer also got confirmation of the same and the Income-tax Officer was also aware that there was an advocate-client relationship between the petitioner and the settlor who created the "Anju Family Trust". I shall, first advert to this submission and then if necessary go into the question whether Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC), is rendered per incuriam. I have already referred to A. Raman and Co.'s case [1968] 67 ITR 11, wherein the Supreme Court has clearly laid down that the jurisdiction of the Incometax Officer to reassess income arises if he has, in consequence of information in his possession, reason to believe that income chargeable to tax has escaped assessm....
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.... thus received was his professional income and the assessee was clearly liable to tax. In George Thomas' case [1985] 156 ITR 412 (SC), certain amounts were received by the assessee as donations through the Indian Christian Crusade from his friends for helping a movement for the spread of religion. The question was whether these amounts were assessable to tax. The Supreme Court held that "the amounts were liable to tax". It has been established that the assessee was carrying on a vocation of preaching Christian Gospel, and helping anti-atheism was the vocation of the assessee. He was running a newspaper in aid of that. The donations received from America were to help him for the said purpose and that they arose out of his carrying on and continued so long as he carried on this avocation or vocation. These receipts, therefore, arose out of his vocation. These were, therefore, his income. In the affidavit filed by the petitioner in the instant case, it is stated, and it is also not in dispute, that the estate duty case relating to Mrs. Chenai was argued in the High Court by Sri P. Ramachandra Reddy, former Advocate-General, but unsuccessfully, and that the matter was carried to ....
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....ts or gains chargeable to income-tax have escaped assessment. Section 34(1)(b) is in pari materia with the present section 147(b) and the Supreme Court considered the scope of the same. The important decisions that are chronologically noteworthy are: Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 (SC), A. Raman and Co. [1968] 67 ITR 11 (SC) and Bankipur Club Ltd. v. CIT [1971] 82 ITR 831 (SC). I have already referred to some of the decisions. The ratio that can be gathered from these decisions regarding the scope of this section can be summed up thus : The Information may come from an external source or from the material already on record, or may be derived from the discovery of new and fresh facts and include information as to the true and correct state of law derived either from the income-tax authorities or other courts of law and also would cover information as to relevant judicial decisions. It can be regarding a fact as well as law. The Income-tax Officer will have jurisdiction to reassess the income if he has, in consequence of information in his possession, reason to believe that income chargeable to tax has escaped assessment. That information must have come to his posse....
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....orm part of the original assessment, section 34(1)(b) would have no application". We shall now see whether, even if the principles laid down in Kalyanji Mavji's case [1976] 102 ITR 287 (SC), viz., that the assessment can be reopened where income liable to be taxed has escaped assessment due to oversight, inadvertence or mistake committed by the Income-tax Officer, are applied to the facts in the instant case, it would show that there is no such oversight, inadvertence or mistake, and that income has escaped assessment, and whether there is such information subsequent to the assessment or whether the Income-tax Officer, on a mere change of opinion, has exercised his jurisdiction under section 147(b) and, therefore, the same is illegal. We have already noticed that in Kalyanji Mavji's case [1976] 102 ITR 287 (SC), after referring to the earlier decisions, it is pointed out that where the Income-tax Officer gets no such information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, the Income-tax Officer has no jurisdiction to reopen. It appears to me that ....
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.... with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of the grounds which induce the Income-tax Officer to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. The expression 'reason to believe' does not mean purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section." The learned judge, while amplifying the above observations, further held (at p. 448) : "Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief ....
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.... ITR 287 (SC), one of the principles laid down is that an assessment can be reopened if income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer, and this ratio is based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority. But this question would arise only if the previous officer has not applied his mind to the material, or has not considered or appraised it; or this principle may also apply to a case where the officer, though outwardly appearing to have applied his mind, considered or appraised the material, but apparently committed mistake or error or acted inadvertently, which resulted in the escapement of income liable to be assessed, because that would show that, in fact, he did not apply his mind, appraise or consider the material. If, on the other hand, the record shows that the previous officer has focussed his attention on this very question, viz., whether any income has escaped assessment, and has passed orders, after the necessary consideration and appraisal, subsequently the officer cannot again reopen, merely because he ....
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....kipur Club's case [1971] 82 ITR 831 (SC) and after affirming the principle that the information must be subsequent to the original assessment, observed thus (at p. 298): "In the instant case, it would appear that three additional facts had come into existence after the original assessment..." It is further observed (at p. 299) : "Thus, therefore, the subsequent information was: (i) the discovery by the Income-tax Officer that the deduction was wrongly claimed and his disallowance of the deduction and (ii) the conduct of the appellant itself in not adducing any evidence or materials to prove its stand. . . " Therefore, it is clear that it is not open to the Income-tax Officer to change his opinion subsequently on the same material and reopen the assessment "at his sweet will and pleasure". One other aspect to be borne in mind is that the question whether the Income-tax Officer, in a given case, has applied his mind, or considered or appraised the material on record or not, depends upon the facts and circumstances of each case as observed in Kalyanji Mavji's case [1976] 102 ITR 287 (SC). In CIT v. Bhagwandas K. Bros. [1973] 91 ITR 256 (Bom), the assessing authority,....
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.... effective representation of the petitioner, Mrs. Chenai, instead of payment of professional fee, preferred to create a trust in favour of the petitioner and his family members ; and that the Income-tax Officer who made the assessment lost sight of the fact that the factum of receipt of Rs. 5 lakhs for the services rendered by the petitioner is assessable as a professional receipt. It is also further mentioned that the Income-tax Officer is directed to take action under section 147(b). In the order sheet which is based on the internal audit report, the Incometax Officer stated that he had come to know from enquiries and the audit report that Sri Y. V. Anjaneyulu was representing income-tax, wealth-tax and estate duty assessments of the late Rasheed Shapoor Chenai and his family and that he was solely responsible for reduction of huge estate duty liability of the late R. S. Chenai, and that the petitioner was also representing the legal heirs of both the father and son, and in view of the substantial reduction gained by the effective representation of Sri Y. V. Anjaneyulu, Mrs. Chenai, instead of payment of professional fee, created the trust which should have been at the instance o....
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....mation would go a long way to establish that he focussed his attention on this question and examined the facts, and after due consideration and appraisal, he did not treat it as income. There is no fresh material whatsoever. It is, however, contended that the audit report itself is a fresh material which came to light only on due enquiry. I am not able to find anything new which has come to light subsequent to the assessment during any such enquiry. There is no material whatsoever to show that there is any such enquiry. At any rate, no material is placed before the court as to what exactly was the enquiry and what was the outcome of it. It is only on the audit report and the subsequent order sheet that reliance is placed. They only go to show that there was no such information from any external source and whatever information the Department claims to have got is only from the records that were already there. Even the advocate-client relationship between the two was not by way of subsequent information.. Admittedly, the petitioner has filed returns for the previous three years before the same officer, in which the details of the fees that he had received from the Chenai family....
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.... of the Act, that would be sufficient to clothe him with jurisdiction to issue notice and the sufficiency of the grounds is not a justiciable issue. Their Lordships further held that the reason must be held in good faith and it cannot be merely a pretence, and that it is open to the, court to examine whether the reasons for the formation of the belief have a rational connection with, or a relevant bearing on, the formation of the belief and are not extraneous or irrelevant for the purpose of the section. It is, therefore, obvious that the expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income-tax Officer and the reason must be in good faith and it cannot be merely a pretence. A mere change of opinion or strong suspicion also cannot be a ground for reopening. It is also well-settled that a finality of an assessment proceeding cannot be disturbed except strictly in accordance with the relevant statutory proceedings because that would be endless. For all these reasons, I am of the view that there is no subsequent "information" within the meaning of section 147(b) of the Act which led the Income-tax Officer to reasonably believe that tax....
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....r such an allegation. On facts, there could be some suspicion whether such a receipt in question would constitute income or not in the hands of the petitioner, and it appears, the reopening is ordered only on such suspicion, and not due to any other pressure from any higher officer. In any event, in the reply affidavit filed by the petitioner, it is stated by the petitioner that it was not necessary to make Sri P. R. Rao, Commissioner of Income-tax, a party, since the petitioner did not allege any mala fides against him. Therefore, this statement itself shows that the reopening was not at the instance of the higher officer. It may not be necessary to make a further probe into this question. In the view I have taken above, it is not necessary to decide the question whether the decision in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC) is rendered per incuriam. Further, the position also is not very clear whether by virtue of the principles laid down in Anandji Haridas and Co.'s case [1968] 21 STC 326 (SC), the decision in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC) becomes per incuriam. In Indian and Eastern Newspaper Society's case [1....