Baladin Ram Vs. Commissioner of
Income-Tax, U.P  INSC 201 (21 August 1968)
21/08/1968 GROVER, A.N.
CITATION: 1969 AIR 351 1969 SCR (1) 800
Indian Income-tax Act, 1922, s. 2(1) and
34(1)(a)- Assessment of income escaping assessment-Applicability of s.
34(1)(a)-Deposits assessed as representing
income from undisclosed sources-Previous year for.
The assessee-a Hindu undivided family (--)
was assessed in 1944-45 for the income of its previous year ending October 30,
1943. The income shown in the return was from iron foundry business and
property, and income from these sources only was taken into account in the
original assessment. The assessee through a son of the karta was also a partner
in the firm Raj Narain Durga Prasad. The accounting year of the firm ended on
April 1, 1944 and the assessee's return,did not show any income as share of
profit in the firm nor was mention made in the return of the existence of the
partnership. In December, 1943 the assessee along with Raj Narain Durga Prasad
started a joint venture of supplying Sarpat and bamboo to the Government.
Between the commencement of the joint venture and February 18, 1944, the
assessee made investments in the Sarpat and bamboo business to the tune of Rs.
27,000 (as found by the Tribunal).. The Income-tax Officer, when he discovered
the assessee's connection with the firm Rajnarain Durga Prasad gave a notice
under s. 34 of the Indian Income- tax Act, 1922 and made in 1952 a revised assessment
for 1944-45, assessment year, in which he added the income of the assessee as
found in the books of the firm to the income already assessed. Later, he
discovered the assessee's investments in the Sarpat and bamboo business and in
1954 he made another revised assessment for the assessment year 1944-45
treating the said investments as representing income from undisclosed sources.
The assessee challenged both the assessments on the ground that s. 34(1)(a) was
not attracted. The assessee's plea was rejected by the Appellate Assistant
Commissioner and the Tribunal. The High Court in 'reference also held against
the assessee who by special leave appealed to this Court. The contentions on
behalf of the appellant were; (i) As regards income from firm Rajnarain Durga
Prasad it was submitted that the accounting year of that firm ended on April 1,
1944 which was well after the close of the assessee's previous year which ended
on October 28, 1943. Neither the. income of the firm, nor the share of assessee
had been determined till then, and it was not possible for the assessee to show
the said income in the return for 1944-45. Moreover the full facts came to the
knowledge of the Income-tax Officer when the assessment for the next assessment
year was made.
Therefore s. 34(1)(a) was not attracted. (ii)
As regards investments in the Sarpat and bamboo business the assessee submitted
that the business itself commenced in December, 1943 and having regard to the
definition of previous year' in s. 2(11) as it existed at the relevant time,
the income from this -source could not be shown as income of his previous year
which ended on October 28. 1943. The income from this source was duly disclosed
to the Income-tax Officer and was actually assessed in 1945-46. Therefore in
the case of the 1954 revised assessment also 's. 34(1)(a) was not attracted.
HELD: (i) The High Court had rightly observed
in dealing with the 1952 assessment that there was no finding of the appellate
tribunal that the share of income from the firm was not known at the time when
the return was filed. In view of the admitted fact that the return filed by the
assessee did not disclose the fact of partnership in the firm Raj Narain Durga
Prasad it was no longer open to the assessee to urge that s. 34(1)(a) was not
attracted, particularly when the burden lay upon the assessee to show that the
Income-tax Officer was aware of the income received from the firm. [804 G-H]
(ii) It is now weD-settled that the only way in which income from undisclosed
sources can be taxed is to take it as the income of the relevant financial
year. Therefore the investments made by the assessee in Sarpat and bamboo
business between December, 1943 and February, 1944 were rightly taxed by the
Income-tax Officer in the year 1944-45.
The disclosure of the investments by assessee
in the proceedings for 1945-46 cannot be treated as a disclosure for the
purpose of assessment year 194445. The plea that the revised assessment made in
1954 was not covered by s. 34(1)(a) could not therefore be accepted. [806 B-C]
Section 68 of the Indian Income-tax Act, 1961 which provides that amounts
credited. in the account books of the assessee and not satisfactorily explained
by him should be treated as income of the 'previous year', does not alter the
position under the old Act. Even under the new Act the position, except where
the credits are found in the assessee's account books, is probably not
different from that laid down in the cases under the old Act. [806 D-F]
Commissioner of Income-tax, Bihar and orissa v.P. Darolia & Sons, 27 I.T.R.
515 and Bishan Dutt v. Commissioner of Income-tax, U.P. & V.P. 39 I.T.R.
Jethmal v. Commissioner of Income-tax, 49
I.T.R. 633, approved.
P.R. Mukherjee v. Commissioner of Income-tax,
30 I.T.R. 535. referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 663 and 664 of 1966.
Appeals by special leave from the judgment
,and order dated January 2, 1964 of the Allahabad High Court in I.T.
Reference No. 244 of 1959.
S.C. Manchanda and J.P. Goyal, for the
appellant (in both the appeals ).
D. Narsaraju, T. A. Ramachandran and 8. P.
Nayar, for the respondent (in both the appeals).
The Judgment of the Court was delivered by
Grover, J. In these appeals by special leave the facts may be stated: The
assessee at the material time was a Hindu Undivided Family. The relevant
assessment year is 1944-45 corresponding to the accounting year ending on
Diwala Samvat 2,000 (October 28, 1943). On February 20, 1945 the Income 802 tax
Officer made an assessment on a total income of Rs. 26,800 odd which comprised
income from the share in the business of Kasi Iron Foundry and the income from
the property. This order was revised under s. 34 of the Indian Income tax Act,
1922 hereinafter called the Act. In the revised assessment order the total
income of the assessee was computed at Rs. 71,731. In this amount a sum of Rs. 40,000
was included as income from undisclosed sources.
This assessment was challenged before the
Appellate Tribunal and was set aside on the ground that there had -not been
proper service of a notice under s. 34. A fresh notice under s. 34 was issued
in October 1951. On October 16, 1952 a revised assessment order was passed and
the total income of the assessee was computed at Rs. 85,817 which included a
sum of Rs. 49,696 as income from undisclosed sources. On March 31, 1953 the
Income tax Officer served on the assessee another notice under s. 34 in respect
of the same assessment year 1944-45. On March 18, 1954 a revised assessment was
made in which was included a sum of Rs.
32,000 as the assessee's income from
undisclosed sources, being the alleged investment of the assessee in the Satpat
and bamboo. business prior to February 18, 1944. The total income of the
assessee was computed at Rs. '1,17,817.
The income from undisclosed source which came
to be included in this computation amounted to Rs. 81,696. The assessee filed
appeals against the assessment order dated October 16, 1952 contending inter
alia that there had been no escapement of any income and that in any case the
first revised assessment dated October 16, 1952 was barred by time under s.
34(1)(b) of the Act as the provisions of s. 34(1)(a) did not apply. The second
revised assessment was challenged on the ground, inter alia, that the Income
tax Officer had no jurisdiction to issue the notice under s. 34 as the material
facts necessary for making the assessment were fully and truly disclosed to the
Income tax Officer during the assessment proceedings for the year 1945-46. That
appeal was also dismissed. Thereafter the assessee filed two appeals before the
Income Tax Appellate Tribunal. Before the tribunal it was contended by the
assessee that the first revised assessment dated October 16, 1952 was barred by
limitation and that the period of limitation was four years under s. 34(1)(b)
and not eight years under s. 34(1)(a).
The second revised assessment was challenged
on the ground that the Income tax Officer had no jurisdiction to issue a notice
and make assessment under s. 34. It was argued that the investment, expenditure
and the profits earned from the business of Sarpat and bamboo had been duly
shown. As regards the first revised assessment the tribunal held that the
income of the assessee from the firm Rajnarain Durga Prasad had escaped
assessment by failure on the part of the assessee to disclose fully and truly
all the facts necessary for making the assessment and that the provisions of
803 s. 34( 1 )(a) were attracted and therefore the period of limitation was
eight years and not four years. With regard to the second revised assessment it
was urged that all the materials necessary for making the assessment were
before the Income tax Officer and by issuing a notice under s. 34 the Income
tax Officer had changed his opinion and a mere change of opinion did not
authorise the Income tax Officer to take recourse to s. 34. The tribunal
disposed of the argument with regard to the second revised assessment in the
"The Income tax Officer who made the
assessment for 1945-46 might have had all the accounts of the business in
Satpat and bamboos before him and might have known the investments made by the
assessee in that business;. The question for consideration is whether the
Income tax Officer had reason to believe that by the failure on the part of the
assessee to fully and truly disclose all the material facts necessary for the
making of the assessment for the year 1944-45, income had escaped assessment.
Surely, even if the Income tax Officer had known that the investment made by
the assessee in that business were his revenue income, he could not have
proceeded u/s 34 because the income could not have been assessed in the
assessment year 1945-46. It could be assessed in the assessment year 1944-45.
The income appearing by way of deposits in the Sarpat business could be
assessed only as income from some undisclosed source and the previous year for
income from undisposed source for which the assessee had not elected any
previous year would be the financial year. The investments were made in the
financial year relevant for the assessment year 1944-45 and were not made in
the financial year relevant for the assessment year 1945-46. The Income tax
Officer had, therefore, no choice but to resort to section 34 of the Act."
The tribunal, however, found as is apparent from its 'order dated March 21,
1957 that the unexplained investment which was really the income of the
assessee from undisclosed source was Rs. 27,875 instead of Rs. 32,000. The
tribunal called for a report on certain other matters with which we are not
concerned and which were disposed of by subsequent order dated August 31, 1958.
On a petition filed under s. 66(1) of the Act the tribunal referred the
following question to the High Court for decision:
"Whether. on the facts and in the
circumstances of the ease the revised assessments under section 34 dated
16-10-1952 and 18-3-1954 are legal and valid".
804 As regards the first revised assessment
the High Court was of the view that even if the provisions of s. 34(1)(b) were
to apply the assessment could not be said to be barred by time nor could it be
said to be barred under s. 34(1)(a) as the assessee had failed to show that the
income tax Officer was aware that the assessee had received income from its
share in the firm. The question was consequently answered in the affirmative so
far as the assessment order dated October 16, 1952 was concerned. The
assessment order of March 18, 1954 was challenged before the High Court on the
ground that there was no default on the part of the assessee attracting
applicability of s. 34(1)(a). It was noticed by the High Court that although
the Income tax Officer had, during the proceedings for the assessment year
1945-46, made an enquiry about the investments in Sarpat and bamboo business no
action had been taken in those assessment proceedings against the assessee but
it could not be presumed that he had accepted the explanation of the assessee.
Having held that the investment represented income from undisclosed source he
was bound to treat it as income which accrued in December 1943 when it was
invested, being the income during the financial year 1943-44 and therefore it
had to be taxed in the assessment year 1944-45.
The question referred was answered in the
affirmative with regard to the assessment order of March 18, as well.
The argument of Mr. S.C. Manchanda in respect
of the assessment made in October 1952 is that there was no failure on the part
of the assessee to disclose material facts. It is submitted that the share
income of the assessee's son from the firm Raj Narain Durga Prasad could not be
shown in the assessee's return as the accounting period of that firm closed on
April 1, 1944 which was well after the close of the previous year of the
assessee which ended on October 28, 1943. It. is said that neither the income
of the firm nor the share of the assessee's son had been determined till then
and it was not possible for the assessee to show the said income in his return.
Moreover the Income tax 'Officer had knowledge of the assessee's interest in
the firm Ramnarain Durga Prasad on May 12, 1947 when the assessment for the
year 1945-46 was made. Thus the escapement, if any, has not resulted from any
default or omission on the part of the assessee. The High Court had disposed of
this contention by observing that there was no finding in the order of the
appellate tribunal that the share of the income from the said firm was not
known at the time when the return was filed. It was admitted that the return
filed by the assessee did not disclose that the assessee enjoyed income from
his share in that firm. It was no longer open to the assessee to press this
contention particularly when the burden lay upon him to show that the Income
tax -Officer was aware that the assessee received income from his share in that
firm. Mr. Manchanda has not been able to persuade us 805 to take a different
view in the matter. The real challenge.
on behalf of the assessee before us has been
to the amount which was included as income from undisclosed source in the revised
assessment order made in March 1954 being the capital which had been invested
in the business of Sarpat and bamboos. This amount, as found by the tribunal,
came to Rs. 27,000 odd and had been invested in partnership with Ram Narain
Durga Prasad for the business of the supply of Sarpat and bamboo. to the
Government, the investment having been made between December 8, 1943 and
February 17, 1944.
According to Mr. Manchanda no income from the
aforesaid business could be shown in the return for the year 1944-45 because
the business itself had been commenced after the close of the relevant previous
year which ended on October 28, 1943. For the assessment year 1945-46, however,
a sum of Rs. 1640 was assessed as the assessee's income in this joint venture.
During the course of the assessment proceedings for the year 1945-46 the
assessee is stated to have filed an affidavit before the Income tax Officer
giving details in respect of the Sarpat and bamboo business. Mr. Manchanda has
invited our attention to the definition of "previous year" as
contained in s. 2( 11 ) of the Act at the relevant period and has pointed out
that the Sarpat and bamboo business did not fall within the year up to which
accounts had been made i.e. October 28, 1943. It was verily impossible, says
Mr. Manchanda, to have shown in the return any amount relating to Sarpat and
bamboo business. The method to be adopted in such a situation has now been
settled by a long course of decisions In Commissioner of Income tax, Bihar
& Orissa v.P. Darolia & Sons(1) the facts were that for the assessment
year 1947-48 the accounting year of the assessee was the Diwali year
corresponding to November 4, 1945 to October 24, 1946. The Income tax Officer
rejected the books of the assessee and ascertained his income from the business
at an estimate for that year.
He also added to this estimate certain cash
credits in its account books entered on the 22nd and 27th of November, 1945, as
secret profits from undisclosed sources which dates were after the end of the accounting
year. It was found that the amount included as secret profits from undisclosed
source was not from the business of the assessee but from separate sources and
no account was maintained by the assessee in respect of the amount nor had it
exercised any option as regards the previous year with respect to that source.
It was held that in the aforesaid circumstances the previous year of the
assessee in respect of its undisclosed source of income was the financial year
ending on March 31, 1946. In Bishan Dutt v. Commissioner of Income tax U.P.
& V.P.(2) the previous year of the assessee for he assessment year 1945-46
in respect of his cloth business was July 4, 1943 to June 26, 1944. In the
account books of that busi- (1) 27 I.T.R. 515. (2) 39 I.T.R.
CI/69--5 806 ness for that period a sum of
Rs. 9,800 appeared as credit in the suspense account on September 2, 1943. The
Income tax Officer, in the absence of a satisfactory explanation, held this
amount to be income from undisclosed source. The view expressed by the High
Court was that there being nothing to show that any accounts in respect of the
undisclosed source of income existed or were maintained or that the assessee
exercised any option under s. 2(11)(i)(a) in respect of such accounts, the only
open to the department was to tax his income
from undisclosed source on the basis of the financial year being the previous
year. On that basis the amount could be taxed only for the assessment year
1944-45 and not for the assessment year 1945-46. On similar facts the Calcutta
High Court expressed the same view in Jethmal v. Commissioner of Income Tax(1).
By now it appears to be well settled and no decision even of a High Court has
been cited to the contrary that in such circumstances the only possible way in
which such undisclosed income can be assessed or reassessed is to make the
assessment during the ordinary financial year.
Mr. Manchanda has called our attention to s.
68 of Income tax Act, 1961 according to which were any sum is found credited in
the books an assessee maintained for any previous year and the assessee offers
no explanation about the nature and source thereof or the explanation offered
by him is not, in the opinion of the Income tax Officer, satisfactory the sum
so credited may be charged to income tax as the income of the assessee of that
previous year. It is, however, obvious that even under the provisions embodied
under the new Act it is only when any amount is found credited in the books of
an assessee that the section will apply. On the other hand if the undisclosed
income was found to be from some unknown source or the amount represents some
concealed income which is not credited in his books the position would probably
not be different from what was laid down in the various cases decided when the
Act was in force.
The last argument of Mr. Manchanda is that in
order to attract the applicability of s. 34(1)(a) of the Act the omission or
the failure on the part of the assessee to disclose fully and truly all
material facts necessary for his assessment must be found to be wail full and
In support of his submission he has relied on
P.R. Mukherjee v. Commissioner of Income tax, West Bengal(2) in which it was
observed that a person cannot be said to have omitted or failed to disclose
something when, of such thing, he has no, knowledge and that a similar
implication is carried by the word "disclose" because one cannot be
expected to disclose a thing unless it is a matter which he know or knows of.
It is altogether unnecessary to decide whether this view is sustainable (1) 49
I.T.R. 633. (2) 30 I.T.R.
807 or not. At any rate, in the present case,
the assessee had failed to show that he did not know and was not aware of the
true position in respect of the sum of Rs. 27,000 odd which was invested in the
Sarpat and bamboo business.
For all these reasons the appeals fail and
are dismissed with costs.
G.C. Appeals dismissed.