Kantamani Venkata Narayana & Sons
Vs. First Additional Income-Tax Officer, Rajahmundry [1966] INSC 232 (27
October 1966)
27/10/1966 SHAH, J.C.
SHAH, J.C.
RAMASWAMI, V.
BHARGAVA, VISHISHTHA
CITATION: 1967 AIR 587 1967 SCR (1) 984
CITATOR INFO:
F 1970 SC1011 (14) RF 1975 SC 703 (11)
ACT:
Income-tax Act (11 of 1922), s. 34--Escaped
assessment--Notice, whether necessary to state clauseGrounds of challenge.
HEADNOTE:
During the assessment proceedings of a
company, the Incometax Officer discovered that there. was a large accretion to
the wealth of the assessee, which had not been disclosed in the assessment
proceedings of the assessee, and the, Officer issued notices under s. 34 for
the reassessment of income during that period. The assessee filed writ
petitions in the High Court, in reply to which the Income-tax Officer filed
affidavits stating that relying on the information received by him, he had
reason to believe that the assessee had not disclosed fully and truly all
material facts and in consequence, income chargeable to tax had escaped
assessment. The writ petitions were rejected and the order was confirmed in
appeal by the High Court. In appeals by the assessee, this Court, HELD : The
appeals must be dismissed.
From the, affidavit of the Income-tax Officer
it clearly appeared that there had been considerable increase in the
investments in the transactions and the wealth of the assessee. The Income-tax
Officer was not seeking to reassess the income on a mere change of opinion.
[989 B] The Income-tax Officer had prima facie reason to believe that
information material to assessment had been withheld, and that on account of
withholding of that information income liable to tax had escaped assessment.
From the mere production of the books of account, it could not be inferred that
there had been full disclosure of the material facts necessary for the purpose
of assessment. Sections 23 and 24 of the Act lay that the assessee is under a
duty to disclose fully and truly material facts necessary for the assessment of
the year and that duty is not discharged merely by the production of the books
of accounts or other evidence. It is the duty of the assessee to bring to the
notice of the Income-tax Officer particular items in the books of account or
portions of documents which are relevant. Even if it be assumed that from the
books produced, the Income tax Officer, if he had been circumspect, could have
found out the truth, the Income-tax Officer may not on that account be
precluded from exercising the power to assess income which had escaped
assessment. [989 G990 B] It is not necessary or imperative that a notice under
s. 34 must specify under which of the two clauses-cl. (a) or cl.
(b) of sub-s. (1) of s. 34, the notice is
issued. [986 A] P. R. Mukherjee v. Commissioner of Income-tax, West Bengal, 30
I.T.R. 535, approved.
Two conditions precedent must co-exist,
before a notice under s. 34 (1)(a) of the Act may be issued : the income-tax
Officer must have reason to believe (1) that income, profits or gains had been
under assessed, and (2) that such under assessment was due to non-disclosure of
material facts by the assessee. Where the Income-tax Officer has prima 985
facie reasonable grounds for believing that there has been a non-disclosure of
primary material fact, that by itself gives him jurisdiction to issue notice
under s. 34 and the adequacy or otherwise of the grounds of such belief is not
open to investigation by the Court. [1987 C] Calcutta Discount Company Ltd. v.
Income-tax Officer, Companies District 1 [1961] 2 S.C.R. 241 and S. Narayanappa
v. The Commissioner of Income-tax, Bangalore [1967] 1 S.C.R.
596 relied on.
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 154, to 165 of 1966.
Appeals by special leave from the judgment
and order dated February 3, 1965 of the Andhra Pradesh High Court in Writ
Appeals Nos. 117 to 128 of 1964.
P. Ram Reddy and A. V. V. Nair, for the
appellants (in all the appeals).
S. V. Gupte, Solicitor-General, R. Ganapathy
Iyer and R. N. Sachthey, for respondent (in all the appeals).
The Judgment of the Court was delivered by
Shah, J. M/s. Kantamani Venkata Narayana & Sons-hereinafter referred to as
'the assessee' is a Hindu undivided family, which was assessed to tax on income
derived principally from money--lending. In the course of proceedings for
assessment of a private limited company styled "Motu Industries
Ltd.," the Incometax Officer, Rajahmundry discovered that there was a
large accretion to the wealth of the assessee which had not been disclosed in proceedings
for its assessment. On March 12, 1959, the Income-tax Officer issued a notice
seeking to reopen the assessment for the year 1950-51. The assessee filed a
return under protest. On March 14, 1960 the Income-tax Officer issued notice of
re-assessment for the year 1951-52, and on December 19, 1960, the Income-tax
Officer intimated the reasons that had prompted him to issue the notices of
re-assessment. On March 24, 1962 the Incometax Officer issued notices under s.
34 for re-assessment of income of the assessee for the years 1940-41 to
1949-50.
The assessee then presented petitions in the
High Court of Andhra Pradesh for writs of prohibition directing the Income-tax
Officer to refrain from proceeding in pursuance of the notices for the
assessment years 1940-41 to 1949-50 and 1950-51 and 1951-52. A single Judge of
the High Court rejected the petitions and the order was confirmed in appeal by
a Division Bench of the High Court. The assessee has appealed with special
leave.
The notice issued by the Income-tax Officer
did not specifically refer to s. 34(1)(a) of the Income-tax Act : it did not
set out the clause under which it was issued. But on that account the
proceeding under s.. 34 is -not vitiated. It was held by the Calcutta
Sup.C.1.166-18 986 High Court in P. R. Mukherjee v. Commissioner of Income-tax
West Bengal(1), that it is not necessary or imperative that a notice -under s.
34 must specify under which of the two clauses-cl. (a)an cl. (b) of sub-s. (1)
of s. 34, the notice is issued. The main notice to be issued in a case under s.
34 is the notice under s. 22(2), and s. 34 merely authorises the issue of such
a notice.
The proceedings for re-assessment cover a
period of 12 years 194041 to 1951-52. Section 34 of the Income-tax Act has
under gone some changes during that period, but the basic scheme of the section
has remained substantially the same.
Power to re-assess income under s. 34(1) as
amended by Act 7 of 1939 could be exercised if "definite information"
had "come into" the possession of the Income-tax Officer, and in
consequence of such information it was discovered that income chargeable to tax
had escaped assessment By the Income-tax and Business Profits Tax (Amendment)
Act 4 of 1948, s. 34(1) was recast to read as follows (1) If(a) the Income-tax
Officer has reason to believe that by reason of the omission or failure on the
part of an assessee to make a return of his income under section 22 for any
year or to disclose fully and truly all material facts necessary for his
assessment for that year, income, profits or gains chargeable to income-tax
have escaped assessment for that year, or have been underassessed, or assessed
at too low a rate,....... or (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, profits or gains chargeable to income-tax have escaped
assessment for any year, or have been under-assessed, or assessed at too low a
rate, he may in cases falling under clause (a) at any time and in cases falling
under clause (b) at the time within four years of the end of that year, serve
on the assessee, .... 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 re-assess such income, profits or gains (1) 30 I.T.R. 535.
987 An Explanation was also added which
states "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 Incometax Officer will not necessarily amount to
disclosure within the meaning of this section." Since on the matter
canvassed in these appeals there is no material change in the section, we will
only refer to the section as amended by Act 48 of 1948.
This Court in Calcutta Discount Company Ltd.
v. Income-tax officer, Companies District 1 and Another(1) observed that before
the Income-tax Officer may issue a notice under s.
34(1) (a) of the Indian Income-tax Act, two
conditions precedent must co-exist : the Income-tax Officer must have reason to
believe (1) that income, profits or gains had been under-assessed, and (2) that
such under assessment was due to non-disclosure of material facts by the
assessee. The Court further held that where the Income-tax Officer has prima
facie reasonable grounds for believing that there has been a non-disclosure of
a primary material fact, that by itself gives him jurisdiction to issue a
notice under s. 34 of the Act, and the adequacy or otherwise of the grounds of
such belief is not open to investigation by the Court.
In a recent judgement of this Court in S.
Narayanappa & Others v. The Commissioner of Income-tax, Bangalore,(2)
Ramaswami J., speaking for the Court observed:
" . . . the legal position is that if
there are in fact some reasonable grounds for the Income-tax Officer to believe
that there had been any non-disclosure as regards any fact, which could have a
material bearing on the question of under-assessment that would be sufficient
to give jurisdiction to the Incometax Officer to issue the notice under s. 34.
Whether these grounds are adequate or not is
not a matter for the Court to investigate. In other words, the sufficiency of
the grounds which induced the Income-tax Officer to act is not a justiciable
issue. It is of course open for the assessee to contend that the Incometax
Officer did not hold the belief that there had been such non-disclosure. In other
words, the existence of the belief can be challenged by the assessee but not
the sufficiency of the reasons for the belief. Again the expression $treason to
believe" in section 34 of the Income-tax Act does not mean a purely
subjective satisfaction on the part of the Income-tax Officer. The belief must
be held in good (1) [1961] 2 S.C.R. 241.
(2) [1967] 1 S.C. R. 596.
988 faith:it cannot be merely a pretence. To
put it differently it is open to the Court to examine the question whether the
reasons for the belief have a rational connection or a relevant bearing to the
formation of the belief and are not extraneous or irrelevant to the purpose of
the section. To this limited extent, the action of the Income-tax Officer in
starting proceedings under s. 34 of the Act is open to challenge in a court of
law." It is clear from the affidavits filed in the Court of First Up
stance that the Income-tax Officer had received information relying upon which
he had reason to believe that the assessee had not disclosed fully and truly
all material facts necessary for the assessment and in consequence of
non-disclosure-of that information, income chargeable to tax had escaped
assessment. In his affidavit, Income-tax Officer stated :
"A scrutiny of the money-lending 'statements'
filed by the assessee for the years ended 31-3-50 and 31-3-51 revealed that
there were large investments made by the assessee in his money-lending business
in those two years. The assessee did not file balance sheets for the said two
years, or for the earlier assessment years and consequently it was not clear
from the statements filed by him, how he could make heavy investments in
money-lending business in those two years." The Income-tax Officer also
stated that in the year of account 1949-50 the total investments in
money-lending business had increased by Rs. 1,33,000/and in the following year
by Rs. 49,000/and the plea of the assessee that growth in the investments of
the assessee in those years was mainly due to "the cash balance" he
by the manager out of his share received on partition between his and his
brothers, and cash gifts from his father-in-law which were till then kept
uninvested even in the money-lending business, was not supported by any
evidence, that the assessee had suppressed the account books for the periods
prior to April 1, 1949, and that the assessee had not produced the deed of
partition relied upon. According to the Income-tax Officer, the net wealth of
the family ,on April 1, 1937, inclusive of investments in the money-lending
business was less than Rs. 50,000/and the investments made by the assessee in
money-lending business were approximately of the ,order of Rs. 21,000/-, that
the assessments made on the family from 1937-38 till 1948-49 showed that the
assessee's aggregate income for those years was Rs. 30,000/, that taking into
account the manager's professional income and the agricultural income of the
assessee, the aggregate could not exceed Rs. one lakh, and that possession of
large wealth on April 1, 1949 which was not explained justified him in
inferring that there "was escapement 989 assessment of huge income or in
any event it had resulted in under-assessment on account of the failure of the
assessee in not disclosing the material facts fully and truly for the assessment
years 1940-41 to 1949-50." The averments made by the Income-tax Officer in
his affidavit which have been accepted by the Court of First Instance, prima
facie, establish that the Income-tax Officer had reason to believe that by
reason of the omission or failure on the part of the assessee to disclose fully
and truly all material facts necessary for his assessment, income chargeable to
income-tax has escaped assessment.
It was urged on behalf of the assessee that
year after year account books and statements of account were produced by the
assessee before the Income-tax Officer, and the Income-tax Officer had computed
to taxable income on the materials furnished, no case for exercising the power
of the Incometax Officer under s. 34 was made out, since power to reassess may
not be exercised merely because on the same evidence the Income-tax Officer or
his successor entertains a different opinion. In our view there is no force in
this contention. From the affidavit of the Income-tax Officer it clearly
appears that there had been considerable increase since 1938 in the investments
in the money-lending transactions of the assessee and in the wealth of the
assessee. The Income-tax Officer was not seeking to reassess the income on a
mere change of opinion. The increase in the wealth discovered was wholly
disproportionate to the known sources of income of the assessee. That was prima
facie evidence on which he had reason to believe that the assessee had omitted
to disclose fully and truly all material facts and that in consequence of such
nondisclosure income had escaped assessment. The Income-tax Officer has said
that no attempt was made by the assessee to furnish some reasonable proof of
the source of the additional wealth : the partition deed was not produced; the
books of account prior to 1948-49 were withheld on the plea that all the books
were lost; no evidence was tendered to show that the fatherin-law of the
manager was possessed of sufficient means to give and did give any large cash
amounts to him; and there was also no explanation why a large amount exceeding
a lakh of rupees was not invested in the moneylending or other business.
The Income-tax Officer had therefore prima
facie reason to believe that information material to the assessment had been
withheld, and that on account of withholding of that information income liable
to tax had escaped assessment.
From the mere production of the books of
account it cannot be inferred that there had been full disclosure of the
material facts necessary for the purpose of assessment. The terms of the
Explanation are too plain to permit an argument being reasonably advanced, that
the duty of the assessee to disclose fully and truly all material facts is
discharged when he produces the books of account or other evidence which has a
material 990 bearing on the assessment. It is clearly implicit in the terms of
ss. 23 and 34 of the Income-tax Act that the assessee is under a duty to
disclose fully and truly material facts necessary for the assessment of the
year, and that the duty is not discharged merely by the production of the books
of accounts or other evidence. It is the duty of the assessee to bring to the
notice of the Income-tax Officer particular items in the books of account or
portions of documents which are relevant. Even if it be assumed that from the
books produced the Income-tax Officer, if he had been circumspect, could have
found out the truth, the Income-tax Officer may not on that account be
precluded from exercising the power to assess income which had escaped
assessment.
It was urged that since the High Court in
appeal did not decide whether any primary facts on which the determination of
the issue of reasonable belief in non-disclosure of material facts necessary
for the assessment of the previous year and escapement of tax in consequence
thereof depended, were not disclosed, the judgment of the High Court should be
set aside. The learned Trial Judge has dealt with in detail the affidavits of
both the assessee and the In come-tax Officer and has come to the conclusion
that there was prima facie evidence of non-disclosure fully and truly of all
material facts necessary for the assessment and on the materials placed before
the Income-tax Officer he had reason to believe that as a consequence of that
non-disclosure income had escaped assessment. The High Court in appeal after
referring to the judgment in Calcutta Discount Company's case() observed
"......without the enquiry being held by the concerned Income-tax Officer
it is not possible, on the material on record, to decide whether or not the
assessee omitted to or failed to disclose fully and truly all material facts
necessary for his assessment for the respective year." The High Court has
pointed out that no final decision about failure to disclose fully and truly
all material facts bearing on the assessment of income and consequent
escapement of income from assessment and tax could be recorded in the
proceedings before them It certainly was not within the province of the High
Court to finally determine that question. The High Court was only concerned to
decide whether the conditions which invested the Income-tax Officer with power
to re-open the assessment did exist, and there is nothing in the judgment of
the High Court which indicates that they disagreed with the view of the Trial
Court that the conditions did exist These appeals therefore fail and are
dismissed with costs.
There will be one hearing fee.
Appeals dismissed.
Y.P.
(1) [1961] 2 S.C.R. 241.
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