AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
1960 (11) TMI 8
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....d the last one by Mr. K. D. Banerjee. The taxes assessed were duly paid up. On March 28, 1951, three notices purporting to be under section 34 of the Indian Income-tax Act, 1922, were issued by the Income-tax Officer calling upon the company to submit fresh returns of its total income and the total world income assessable for the three accounting years relating to the three assessment years 1942-43, 1943-44 and 1944-45. The appellant company furnished returns in compliance with the notices but on September 18, 1951, applied to the High Court of Calcutta for issue under article 226 of the Constitution of appropriate writs or orders directing the Income-tax Officer not to proceed to assess it on the basis of these notices. The first ground on which this prayer was based was mentioned in the petition in these terms : " The said pretended notice was issued without the existence of the necessary conditions precedent which confers jurisdiction under section 34 aforementioned, whether before or after the amendment in 1948." The other ground urged was that the amendment to section 34 of the Income-tax Act in 1948 was not retrospective and that the assessment for the years 1942-43, 1943-44 ....
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....ax have escaped assessment for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed, 6. He may in cases falling under clause (a) at any time within eight years and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or reassess such income profits or gains or recompute the loss or depreciation allowance ; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section : Provided that-- (i) the Income-tax Officer shall not issue a notice under this sub-section, unless he has recorded his reasons for doing so and the Commissioner is satisfied on such reasons recorded that it is a fit case for the issue of such notice ; (ii) the tax shall be chargeable at the rate at which it would have been....
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....e had been some omission or failure to disclose fully and truly all material facts necessary for the assessment " for any of these years in consequence of which the under-assessment took place. 9. Before we proceed to consider the materials on record to see whether the appellant has succeeded in showing that the Income-tax Officer could have no reason, on the materials before him, to believe that there had been any omission to disclose material facts, as mentioned in the section, it is necessary to examine the precise scope of disclosure which the section demands. The words used are " omission or failure to disclose fully and truly all material facts necessary for his assessment for that year." It postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the....
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....ty, from the documents and other evidence disclosed. 11. Does the duty, however, extend beyond the full and truthful disclosure of all primary facts? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else--far less the assessee--to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences--whether of facts or law--he would draw from the primary facts. 12. If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicate it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn ? 13. ....
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....ere in the nature of mere change of investments. Now the results of the company's trading from year to year show that the company has really been systematically carrying on a trade in the sale of investments. As such the company had failed to disclose the true intention behind the sale of the shares and as such section 34(1)(a) may be attracted." 17. The only non-disclosure mentioned in the report is that the company had failed to disclose " the true intention behind the sale of the shares." Mr. Choudhury contends that this is not an omission to disclose a material fact within the meaning of section 34. The question whether sales of certain shares were by way of changing the investments or by way of trading in shares has to be decided on a consideration of different circumstances, including the frequency of the sales, the nature of the shares sold, the price received as compared with the cost price, and several other relevant facts. It is the duty of the assessee to disclose all the facts which have a bearing on the question; but whether the assessee had the intention to make a business profit as distinguished. from the intention to change the form of the investments is really....
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...., that if one looked at this report only it would not be possible to say that the Income-tax Officer had any non-disclosure of material facts by the assessee in mind when he assumed jurisdiction. It has to be remembered, however, that in sending a report to the Commissioner, the Income-tax Officer might not fully set out what he thought amounted to a non-disclosure, because it is conceivable that the report may not be drawn up carefully and may not contain a reference to all the non-disclosures that operated on his mind. We have, however, on the record an affidavit sworn by the same Income-tax Officer who started the section 34 proceedings. It is reasonable to expect that in this affidavit which was his opportunity to tell the court what non-disclosure he took into consideration he would state as clearly as possible the material facts in respect of which there had not been in his view a full and true disclosure. Mr. Banerjee's statements in this matter are contained in paragraphs 5, 6 and 7 of his affidavit, They are in these words : "5. With reference to paragraphs 2 and 3 of the said petition, I crave reference to the assessment orders therein mentioned. The assessment orde....
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....satisfied that it was a fit case for issue of a notice under section 34 of the Income-tax Act. Thereafter I issued the prescribed notices under section 34 of the Income-tax Act. The said reports were made and notices issued in respect of all the three years mentioned in the petition and copies of the report and notice for one of such years are included in the schedule hereto annexed and marked 'A'. The report and notices for the two other years are exactly similar." 20. It appears from this that the statements made by or on behalf of the company which the assessing authority considered to amount to non-disclosure of material facts were these : (i) the company was not a dealer in shares and securities and (ii) throughout the whole of its history the company bought no shares whatsoever. It has not been suggested before us that in fact at any time up to the conclusion of the assessment proceedings for the years 1942-43, 1943-44 and 1944-45 the company did in fact make a single purchase of shares. Clearly, therefore, the Income-tax Officer had no reasonable ground for thinking that anything as regards the purchase of shares had not been disclosed. The company does not dispute ....
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....ozario and K. D. Banerjee, concluded the proceedings without referring to the memorandum and articles of association of the company. These officers knew well that the company was claiming to be an investment company only. They had to consider the question whether the sales were of the nature of trade or of the nature of change of investment. It is unthink able that they would not examine the memorandum and articles of association. Besides, it is pertinent to note that in paragraph 4 of his affidavit Kanakendra Narayan Banerjee refers to the memorandum of association and states that " by its memorandum of association the company has been authorised to carry on the various kinds of business which have been specified in sub-sections (1) and (2) of clause 3 of the said memorandum of association." He does not say that the articles or the memorandum of association were not shown during the assessment proceedings for the years 1942-43, 1943-44 and 1944-45. If he had any reason to believe that these were not shown he would have certainly mentioned that fact. For, that would undoubtedly amount to non-disclosure of a material fact. 24. It must, therefore, be held that the Income-tax Officer....
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....osure of material facts, cannot therefore be accepted. 27. Mr. Sastri next pointed out that at the stage when the Income-tax Officer issued the notices he was not acting judicially or quasi-judicially and so a writ of certiorari or prohibition cannot issue. It is well settled however that though the writ of prohibition or certiorari will not issue against an executive authority, the High Courts have power to issue in a fit case an order prohibiting an executive authority from acting with out jurisdiction. Where such action of an executive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings and unnecessary harassment, the High Courts, it is well settled, will issue appropriate orders or directions to prevent such consequences. 28. Mr. Sastri mentioned more than once the fact that the company would have sufficient opportunity to raise this question, viz., whether the Income-tax Officer had reason to believe that under-assessment had resulted from non-disclosure of material facts, before the Income-tax Officer himself in the assessment proceedings and, if unsuccessful there, before the Appellate Officer or the Appellate Tribunal or ....
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....ave had the advantage of reading the judgments prepared by my brethren, Das Gupta and Shah, JJ. The point involved in the case is a very short one, and the answer, as it appears to me, equally so. The appellant company's income, profits and gains for the assessment years, 1942-43, 1943-44 and 1944-45, were duly assessed and taxed. The orders were respectively passed on January 26, 1944, February 12, 1944 and February 15, 1945. 34. On March 28, 1951, three notices under section 34 of the Indian Income-tax Act were issued calling upon the appellant company to submit fresh returns in respect of the previous years relative to each of the assessment years above-mentioned. Since this action was taken after more than four years, the matter fell to be governed by section 34(1)(a) of the Indian Income-tax Act, as amended in 1948. The clause provided an extended period for sending a notice calling for a return for the purpose of assessing or reassessing income, profits and gains which had escaped assessment or had been under-assessed for any year within eight years, if the Income-tax Officer " has reason to believe that by reason of the omission or failure on the part of an assessee to ....
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....ial facts could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section." 39. This means quite clearly that the mere production of evidence is not enough, and that there may be an omission or failure to make a full and true disclosure, if some material fact necessary for the assessment lies embedded in that evidence which the assessee can uncover but does not. If there is such a fact, it is the duty of the assessee to disclose it. The evidence which is produced by the assessee discloses only primary facts, but to interpret the evidence, certain other facts may be necessary. Thus, questions of status, agency, the benami nature of transactions, the nature of trading and like matters may not appear from the evidence produced, unless disclosed. If it be merely a question of interpretation of evidence by an Income-tax Officer from whom nothing has been hidden and to whom everything has been fully disclosed, then the assessee cannot be subjected to section 34, merely because the Income-tax Officer miscarried in his interpretation of evidence. But it is otherwise, if a contention which is contrary to f....
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....ie, there was not only concealment of a fact but, on the contrary, maintaining of a falsehood, and this was sufficient to bring this matter within the extended period. Every contention contrary to the Income-tax Officer's opinion is not necessarily concealment of a material fact, but some contentions made with a mental reservation as to the true state of affairs may amount to such concealment, if they involve non-disclosure of facts related to other facts and known to the assessee. 43. The company still persists that the sales of shares were casual transactions, and this contention will, no doubt, be decided hereafter. But the question will be decided after taking into consideration the nature of the business of the company, and till that is done, the Income-tax Officer believes that the contention raised before and persisted in is not a mere contention but maintenance of a falsehood about the nature of the transactions and the business of the company. The existence of such a belief is sufficiently established by the report of the Income-tax Officer and the satisfaction of the Commissioner, and this has not been gainsaid. 44. In my opinion, the Divisional Bench of the High Co....
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....satisfied on such reasons recorded that it is a fit case for the issue of such notice ; (ii) the tax shall be chargeable at the rate at which it would have been charged had the income, profits or gains not escaped assessment or full assessment, as the case may be; and (iii) where the assessment made or to be made is an assessment made or to be made on a person deemed to be the agent of a non-resident person under section 43, this sub-section shall have effect as if for the periods of eight years and four years a period of one year was substituted. Explanation.-- Production before the Income-tax Officer of account books or other evidence from which material facts could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section." 48. This section provides machinery for assessment or reassessment if it be found that income, profits or gains " have escaped assessment or have been under-assessed or assessed at too low a rate or have been made subject to excessive relief under the Act or excessive loss or depreciation allowance has been computed," which expression may for convenience of reference b....
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.... that belief. The belief must be held in good faith : it cannot be merely a pretence. The expression does not mean a purely subjective satisfaction of the Income-tax Officer : the forum of decision as to the existence of reasons and the belief is not in the mind of the Income-tax Officer. If it be asserted that the Income-tax Officer had reason to believe that income had been under-assessed by reason of failure to disclose fully and truly the facts material for assessment, the existence of the belief and the reasons for the belief, but not the sufficiency of the reasons, will be justiciable. The expression therefore predicates that the Income-tax Officer holds the belief induced by the existence of reasons for holding such belief. It contemplates existence of reasons on which the belief is founded, and not merely a belief in the existence of reasons inducing the belief ; in other words, the Income-tax Officer must on information at his disposal believe that income has been under-assessed by reason of failure fully and truly to disclose all material facts necessary for assessment. Such a belief, be it said, may not be based on mere suspicion : it must be founded upon information. 5....
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.... Income-tax Officer who, by the way, was a successor to the officers who had made the original assessments, was not merely changing his opinion as to facts previously known, but was taking notice of a new fact." 53. Prima facie, the finding recorded by the court of first instance and confirmed by the court of appeal is one on a question of fact and this court would not be justified in entering upon a reappraisal of the evidence. But it is contended on behalf of the company that the finding is based on no materials, and to that plea I may advert. By section 22 of the Income-tax Act, a duty is imposed upon every taxpayer whose total income exceeds the maximum which is not chargeable to income-tax to make a return in the prescribed form and verified in the prescribed manner, setting forth his total income during that year. If the taxpayer making the return fails to disclose fully and truly all material facts necessary for the assessment of the year in question, the jurisdiction of the Income-tax Officer to reassess is invited. The company in its petition for the issue of a writ contended by paragraph 7 that the notices were ultra vires and illegal and that the Income-tax Officer was ....
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....es contrary to its representation that it was not. The company filed appeals before the Appellate Assistant Commissioner which were rejected in September, 1950, and the assessments were confirmed. The company thereafter filed second appeals before this Income-tax Tribunal which appeals are now pending." Paragraph 7 : " With reference to paragraph 5 of the said petition, I deny that I pretended to act under section 34 of the Income-tax Act as alleged. I have reasons to believe that by reason of the omission or failure of the company to disclose fully and truly all material facts necessary for its assessments, the income, profits and gains chargeable to income-tax had been under-assessed. I recorded my reasons and made 3 reports (one for each year) in the prescribed form and submitted them before the Commissioner of Income-tax and the latter was satisfied that is was a fit case for issue of a notice under section 34 of the Income-tax Act. Thereafter I issued prescribed notices under section 34 of the Income-tax Act. The said reports were made and notices issued in respect of all the three years mentioned in the petition and copies of the report and notice for one of such years are ....
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....if the Income-tax Officer did not draw the correct inference, the jurisdiction to reassess could not be invoked. He urged that it was for the Income-tax Officer, on the preliminary facts disclosed to him, to raise his inferences of fact and to base his conclusions on the preliminary as well as the inferential facts, and if, in arriving at his conclusion on the preliminary and the inferential facts, the Income-tax Officer committed an error, he could not seek to commence proceedings for reassessment on being apprised of the error. It was said that the Income-tax Officer knew that the company was an investment corporation, that the shares held by the company were sold from time to time, and that profits were earned by the sale of those shares, and that on these materials the Income-tax Officer might have held that the company was a dealer in shares, but if he did not draw that inference, the under-assessment, if any, was not by reason of failure to disclose fully and truly all material facts. Counsel submitted that the condition of the exercise of jurisdiction under section 34 is failure to disclose fully and truly all material facts necessary for assessment and not failure to instru....
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....ecurities quite unconnected with its regular course of business so that the profit or loss also on sale of such shares or securities may be treated as not arising out of its regular business carried on. On the other hand, it is an investment company of which the very first object clause is to hold and deal in shares. Profit on sale of such shares therefore arises out of its regular course of business and it must be taxable." 60. From that order of assessment, it is manifest that the assessing officer held that the company was formed with the object of acquiring, holding, exchanging, selling and dealing in shares, that the shares acquired became the trading assets of the company to be disposed of when opportunities occurred for earning profits ; and that the activities of selling shares in which surplus assets of the company were invested were a part of the regular business carried on by the company. 61. There is no evidence that the memorandum and articles of association referred to in paragraph 4 of the affidavit were produced in the course of the assessment of the relevant years ; nor is there evidence to show that it was disclosed that the acquisition of shares was incidental ....
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.... Income-tax Officer discloses that his predecessor in office was told that the sales of shares effected by the company were casual transactions and were in the nature of a mere change of investments. " This was not strictly accurate. The record, therefore, clearly shows that the company had failed to disclose fully and truly all material facts in relation to assessment in two respects, (1) that it failed to produce the memorandum and articles of association showing the purposes for which the company was incorporated, and (2) that the shares were acquired as part of the business of financiers. The company also made a statement which is partially untrue when it stated that sales were mere casual transactions. There were materials before the Income-tax Officer on which he had reason to believe that by reason of the failure of the company to fully and truly disclose material facts, its income was underassessed. Whether on these facts, a conclusion that in fact the company was carrying on the business of trading in shares could be founded is at this stage entirely immaterial. If there was reason to believe, the alleged inadequacy of the materials on which the belief could be founded is ....