TaxTMI 
TaxTMI 
1975 (5) TMI 4
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....ion (Investigation) of the Central Board of Direct taxes. According to the assessee, its application was examined at great length with reference to the books of account with particular emphasis on the contract business, as a flat rate on percentage basis of the gross receipts was sought to be adopted for determining the assessable income and ultimately on 28th of August, 1970, the terms of settlement were communicated to the petitioner. In regard to the contract business, it was stipulated that ten per cent. of the gross receipts would represent the assessable income. On the basis of the terms of settlement, assessments for the five years in question were completed as per the particulars provided below: Assessment year Date of return Date of completion of assessment 1965-66 6-9-1965 24-3-1970 1966-67 2-12-1966 19-3-1971 1967-68 31-10-1967 29-2-1972 1968-69 20-11-1968 29-2-1972 1969-70 31-10-1969 29-2-1972 3. The Income-tax Officer (opposite party No. 1) took up the assessment for 1970-71, and completed the same by order dated February 12, 1973. He came to hold that the "work-site account" in which an amount of Rs. 10,45,934 a....
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....were completed for these years. Therefore, action under section 147(a) of the Act was not open to be taken. As far as the notices are concerned, they are claimed to be barred by limitation as per the provisions of section 149(1)(b) of the Act. (ii) The Income-tax Officer has no reason to believe that on account of omission or failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment, income chargeable to tax had escaped assessments for the years in question. Accordingly, the notices are without jurisdiction and liable to be quashed. (iii) The report of the Income-tax Officer to the Commissioner of Income-tax was upon untenable grounds and the true picture of the matter had not been disclosed to the Commissioner of Income-tax when proposal was sent up for reopening the assessments and Commissioner's consent was asked for. Thus, the entire proceeding is vitiated by mala fides of the Income-tax Officer. Again, the Commissioner of Income-tax having acted mechanically in according sanction by putting of a rubber-stamp, the bald sanction is vitiated on that ground also. (iv) The settlement entered into....
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.... "Jurisdiction of the Income-tax Officer obviously arises when he has reason to believe that by reason of omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment, income of the assessee has escaped assessment, or has been under-assessed, and when the party claiming relief challenges on oath the existence of the conditions, which confer jurisdiction, and sets out facts which may, unless disproved, support his case, an order dismissing his petition in limine may not properly be made." 11. Several instances where the court has entertained applications under article 226 of the Constitution have been indicated to us. For instance, Chhugamal Rajpal v. S. P. Chaliha [1971] 79 ITR 603 (SC) and Union of India v. Rai Singh Deb Singh Bist [1973] 88 ITR 200 (SC) are cases where notwithstanding alternative relief available under the statute, the application was entertained and relief was even granted. The preliminary objection must, therefore, stand overruled. 12. We shall now deal with the several contentions of the assessee. Contention No. 1 13. Section 147 of the Act provides: "If-- (a) the In....
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....essee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the legislature has put in the Explanation, which has been set out above. In view of the Explanation, it will not be open to the assessee to say, for example--'I have produced the account books and the documents: You, the assessing officer, examine them, and find out the facts necessary for your purpose: My duty is done with disclosing these account books and the documents.' His omission to bring to the assessing authority's attention those particular items in the account books, or the particular portions of the documents, which are relevant, will amount to 'omission to disclose fully and truly all material facts necessary for his assessment'. Nor will he be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section gives a quietus to all such contentions; and the position remains that, so far as primary facts are concerned, it is the asses....
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....lief. If, therefore, an assessee is in a position to show that he had disclosed at the time of the original assessment all that he was bound to disclose, i.e., all the primary facts relevant to and having a bearing on his assessment, there would be no ground for the Income-tax Officer to have reason to believe that there was any omission or failure on the assessee's part to disclose. Similarly, if an assessee can show that, though there was omission or failure to disclose on his part, such failure or omission had not resulted in any non-assessment or under-assessment, etc., surely there would be no ground for the Income-tax Officer to have reason to believe that there was any non-assessment or under-assessment, etc., consequent upon such omission or failure. It would, therefore, follow that primary facts necessary for a proper assessment are objective facts, the existence or non-existence of which is not a matter of reasonable belief on the part of an Income-tax Officer. An Income-tax Officer cannot say that he had reason to believe that a certain fact which was relevant for assessment, and, therefore, a primary fact, existed and that it was not disclosed by an assessee if such....
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....st year the closing balance under this head was Rs. 16,737 while at the close of the assessment year 1970-71, it stood at Rs. 10,45,934. For convenience of this hon'ble court, a summary of the position is indicated in annexure 7. 7. That during each of these years the assessee had disclosed all primary facts relating to the accounts to the Income-tax Officer. The balance-sheets had been scrutinised with great care in view of the fact that the income to be assessed in the hands of the assessee was substantial and it constitutes one of the important assessees of the Income-tax Officer's circle." 19. In paragraph 2 of the counter-affidavit, the deponent, Income-tax Officer, who made the assessment for the assessment year 1970-71, mainly dealt with the factual position in relation to that year. The counter-affidavit dealt with paragraphs 5, 6 and 7 of the writ petition in the following way: "7. That the allegations made in para. 5 of the writ petition are not disputed. But the accounts of all the branches were not produced before opposite party No. 1. The Income-tax Officer (opposite party No. 1) was not furnished with any list of creditors in relation to t....
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.... denial in the counter-affidavit in the absence of relevant records, the deponent begs to submit, are not acceptable in law." 22. The objection raised by the petitioner is germane. It is not the case of the department that the assessing officers of the respective five years are not available. Even if their affidavits were not produced to support the stand of the revenue, public records to support the plea raised in the counter-affidavit were expected to be produced for effectively opposing the stand of the petitioner. Though some of the records were before the court having been called for at the instance of the petitioner, learned standing counsel did not indicate to us any material at the time of hearing to support the stand of the revenue that there had been concealment of primary facts. 23. Petitioner's assertion in paragraph 5 of the writ application that all the accounts were produced and were duly checked up has been accepted in paragraph 7 of the counter-affidavit. Whether the accounts of the branches were produced or not, was not within the knowledge of the deponent of the counter-affidavit. Even if a list of creditors in relation to the work-site account may not ....
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.... that the assessee had failed to disclose fully and truly certain facts material to the assessment of income which had escaped assessment." 26. Keeping the legal position in view and taking the facts of the case into consideration in the light of the materials indicated above, we have no hesitation in our minds to conclude as a fact that the primary facts relating to the work-site account had been disclosed to the Income-tax Officer in each of the five years at the time assessment was done and for the reasons best known to the assessing officers, the amounts appearing in the work-site account were considered not to be taxable. There was thus no failure on the part of the assessee to discharge his duties as required under the law. Learned standing counsel for the revenue has conceded before us that if the finding be that the accounts had been produced and primary facts had been disclosed, subsequently the Income-tax Officer was not entitled to initiate a proceeding under section 147 of the Act merely upon a change of his opinion. The concession is based upon the settled position in law and it is not necessary to refer at length to precedents. See Income-tax Officer v. Barkat Ali ....
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.... there has been under-assessment; and (ii) his having reason to believe that such under-assessment has resulted from non-disclosure of material facts", must exist before the Income-tax Officer has jurisdiction to start a proceeding. A Bench of this court in the case of Munilal Ramdayal v. Income-tax Officer [1970] 76 ITR 151 (Orissa), while indicating the law on the point observed that before issue of notice under section 148, two conditions precedent are to be fulfilled, namely: "(a) The Income-tax Officer must have reason to believe that the income, profits or gains chargeable to income-tax have been under-assessed; (b) He must also have reason to believe that such under-assessment occurred by reason of omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year." 30. Sub-section (2) of section 148 of the Act requires that-- "the Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so." 31. Whether the Income-tax Officer had sufficient grounds for entertaining a reason to believe is not justiciable, but where the assessee co....
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....ed in the order of the Income-tax Officer had vanished with the determination of the Appellate Tribunal in regard to the position relating to the assessment year 1970-71. The basis for the reasonings of the Income-tax Officer having been dropped out from the records of the assessment year 1970-71, with the disposal of the appeal for that assessment year by the Tribunal, there was no scope for the Income-tax Officer to come to the view he has expressed in his order dated August 21, 1973. If the basis of his knowledge or information was otherwise than the records of the assessment year 1970-71, the position would have been certainly different and on the reasoning that the sufficiency is not justiciable, we would have declined to interfere in the matter. 33. The position, however, is very different. The Income-tax Officer took into account the views expressed by him in the order of assessment for a subsequent year as upheld in appeal by the Appellate Assistant Commissioner to be the basis for initiation of a proceeding under section 147 though by the time he came to record his reasons, the position had been substantially varied by the ultimate decision of the Tribunal in regard to ....
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....that aspect of the matter a little later while dealing with the question of sanction and, therefore, though it is relevant for this aspect of the matter, for avoiding repetition, we do not deal with it here. Our conclusion, therefore, is that the Income-tax Officer had no reason to believe that there had been any escapement of income from the net of taxation within the meaning of section 147(a) of the Act. Contention No. 3: As already noticed, the Income-tax Officer sent up proposals to the Commissioner of Income-tax for obtaining sanction to initiate proceedings under section 147(a) of the Act against the assessee for the five years in question by his letter dated August 21, 1973. For each of the years in question in the prescribed form, the Income-tax Officer sent up the proposal. For convenience, we extract below the entire proposal in relation to the assessment year 1965-66. "FORM FOR RECORDING THE REASONS FOR INITIATING PROCEEDINGS UNDER SECTION 148 AND FOR OBTAINING THE APPROVAL OF THE COMMISSIONER OF INCOME-TAX/CENTRAL BOARD OF DIRECT TAXES. 1. Name and address of the assessee. M/s Govinda Choudhury & Sons, Gosaninuagaon, Berhampur. 2. G.I....
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....of the branch or how the branch could be a creditor to the assessee himself. 2. The assessment was completed by adding the entire sum of Rs. 10,45,000 to his income as this amount counter-balanced the assets of the assessee. At the appellate stage, however, the assessee contested the additions mainly on the ground that the above account was built up by accretions from year to year and hence the entire amount was not to be assessed as income for the year. While no attempt was made either to produce the accounts of the branch or to establish the genuineness of the liability, the assessee offered the following explanation in the written grounds of appeal filed before the Appellate Assistant Commissioner. '8. For that the learned Income-tax Officer has omitted to consider the fact that the income available in the hands of the partners during the several years of assessment to which the said amount relates was much in excess of the amount shown under the head of work-site and merely because a separate head was maintained in the accounts, the addition in the manner made by the learned Income-tax Officer cannot be sustained.' The Appellate Assistant Comm....
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.... 1970-71. Hence, proposal for action under section 147(a) read with Explanation 2 to section 153 of the Income-tax Act, 1961, may please be approved." 36. We have already stated that the Tribunal's appellate decision in respect of the assessment year 1970-71 was pronounced on June 2, 1973. The assertion of the assessee that the Income-tax Officer had already a copy of the appellate order of the Tribunal by the time he sent up his proposal on August 21, 1973, is not disputed. The Income-tax Officer made no reference to the disposal of the appeal by the Tribunal or the findings of the Tribunal reversing the Income-tax Officer's conclusions as also those of the Appellate Assistant Commissioner. Reference in the ultimate paragraph of the proposal to the fact that the Appellate Assistant Commissioner had excluded the amount in respect of which escapement was indicated was wholly unjustified, because, as a fact, by then the position was that the entire addition in relation to the work-site account stood deleted. Similarly, reference to Explanation 2 of section 153(3) of the Act was totally unjustified. Explanation 2 is to the following effect: "Where, by an order refe....
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....ncome of the assessee had escaped assessment were non-existent. Section 151 of the Act provides: "(1) No notice shall be issued under section 148 after the expiry of eight years from the end of the relevant assessment year, unless the Board is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice. (2) No notice shall be issued under section 148 after the expiry of four years from the end of the relevant assessment year, unless the Commissioner is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice." 39. Admittedly, to the facts of this case, sub-section (2) has application. Sanction of the prescribed authority is a condition precedent to issue of notice and if there be no sanction, the proceedings are invalid. See Commissioner of Income-tax v. Maharaja Pratapsingh Bahadur [1961] 41 ITR 421 (SC). The statute requires the Commissioner to take into account the reasons recorded by the Income-tax Officer. The Income-tax Officer, therefore, is obliged under the law to make a full report of the correct state of affairs and furnish the Commissioner adequa....
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.... deleted. The Income-tax Officer has also stated in his affidavit that through inadvertence it was deleted. So he produced before me the original file where the Commissioner's signature appears bearing the date 30th March, 1971. In the cases, Chhugamal Rajpal v. S. P. Chaliha [1971] 79 ITR 603 (SC) and Commissioner of Income-tax v. Burlop Dealers [1971] 79 ITR 609 (SC), the Supreme Court has said that if the Commissioner mechanically accorded sanction, that is not proper sanction. In the present case, as I have seen, there was only a rubber stamp above the signature of the Commissioner." 43. These observations were used against the revenue. In the facts of the case in hand, we must, therefore, hold that there has been no valid sanction as required under section 151(2) of the Act and, therefore, the initiation of the proceedings is without jurisdiction. 44. Before we leave this aspect of the matter, we think it pertinent to notice the pleadings. In paragraph 16 of the writ application, the petitioner pleaded: "........... In the face of such a finding the present proceeding is not only without jurisdiction but smacks of the mala fides of the Income-tax Officer. Th....
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....hing the settlement with the revenue the returns, balance-sheets, profit and loss statements, books of account of the assessee for each of the years were scrutinised, the genuineness of the work-site account had been taken into consideration and the assessee's books for the entire period now concerned had been duly scrutinised by high authorities of the revenue. Settlement was ultimately reached after taking note of the assessee's accounts. In agreeing to compute income from gross contract receipts at 10 per cent. the work-site account was certainly given its due consideration. The impugned action of the Income-tax Officer is bound to interfere with such settlement and disturb the matter. It is not open to him to exercise such jurisdiction without the necessary clearance from the board." 47. In paragraph 17 of the counter-affidavit, the Income-tax Officer averred: "That the facts stated in para. 17 of the writ petition are not admitted as correct and true. The settlement proceeding before the opposite party No. 4 was limited to two points as stated above and the work-site account was not a subject-matter of settlement. It is not correct for the petitioner to say....