S. Narayanappa & Ors Vs.
Commissioner of Income-Tax, Bangalore  INSC 190 (27 September 1966)
27/09/1966 RAMASWAMI, V.
CITATION: 1967 AIR 523 1967 SCR (1) 590
F 1967 SC 587 (5) F 1970 SC1011 (13) RF 1972
SC 689 (13) R 1972 SC2617 (9) R 1973 SC 370 (11) RF 1975 SC 703 (11) D 1976 SC
437 (16) RF 1976 SC1753 (8) F 1985 SC 989 (9) RF 1986 SC1853 (20) RF 1987
Income-tax Act (11 of 1922), s. 34-Scope of.
For the assessment year 1951-52, the
appellant did not file a return of his income under s. 22 of the Income-tax
Act, 1922 but the Income tax Officer assessed the income at a certain figure.
When examining the material for the assessment year 1955-56, it was discovered
that the assessee made large investments and suppressed items of house property
acquired by him. The Income-tax Officer, therefore, issued a notice under s.
34(1) and after examining the return assessed the income for the assessment
year 1951-52 at a much higher figure. In the reference to the High Court, the
appellant questioned the jurisdiction of the Officer to initiate proceedings
under s. 34(1), but the High Court held against him.
In appeal to this Court,
HELD : (i) The Income-tax Officer had reasonable
grounds for thinking that there was non-disclosure of material facts on the
part of the appellant and that there was under- assessment for the assessment
year 1951-52, caused by the assessee's failure to submit his return. [593 C]
Two conditions must be satisfied in order to confer jurisdiction on the
Income-tax Officer to issue notice under s. 34, namely, (i) the Officer must
have reason to believe that the income, profits or gains chargeable to
income-tax had been under-assessed; (ii) he must have reason to believe that
such under-assessment had occurred by reason of the omission or failure on the
part of No assessee to make a return or disclose fully all material facts
necessary for assessment. The existence of the belief, and whether the reasons
for -the belief have a rational connection with or relevant bearing on, the
formation of the belief, are open to examination by the court. But if there are
in fact some reasonable grounds for the Officer to believe that there had been
a non-disclosure as regards any fact, which could have a material bearing on
the question of under-assessment, that would be sufficient to give him
jurisdiction to issue the notice under s.34, and their sufficiency cannot be
challenged by the assessee. [592 C-H] (ii) The scheme of s. 34 is that if the
conditions of the main section are satisfied a notice has to be issued to the
assessee. But before issuing the notice the proviso requires that the officer
should -record his reasons and obtain the sanction of the -Commissioner for
initiating action under the section. But there is no requirement in the Act
that the reasons which induced the Commissioner to accord sanction should also
be communicated to the assessee.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 562 of 1965.
Appeal by special leave from the judgment and
order dated July 24, 1963 of the Mysore High Court in I.T.R.C. No. 3 of 1963.
591 R. Gopalakrishnan, for the appellants.
S. V. Gupte, Solicitor-General, N. D.
Karkhanis Sachthey, for the respondent.
The Judgment of the Court was delivered by
Ramaswami J. The appellant was carrying on business in jewellery, copper-wire
and money lending. The books of accounts of the appellant were closed on the
30th of June every year. For the assessment year 1951-52 (for which the
previous year ended on 30th June, 1950) the appellant did not comply with the
notice issued under s. 22(2) or section 22(4) of the Income-tax Act. No return
was filed by the appellant. The assessment was completed by the Income-tax
Officer on such material as was available on the 23rd February, 1955 and the
income was assessed at Rs. 36,068/-.
Subsequently, while making assessment for the
assessment year 1955-56, the appellant was asked to furnish a wealth statement
which was actually filed on the 30th June, 1954.
From the wealth statement it was found that
the appellant had made investments for Rs. 39,000/during the previous year
which ended on the 30th June, 1950, though in respect of that previous year,
the appellant's income was assessed only at Rs. 36,068/-. A scrutiny of the
wealth statement and the Bank account and the extensive nature of the business
carried on by the appellant led the Income-tax Officer to entertain a belief
that the income of the year 1951-52 had been under-assessed. He accordingly
issued a notice under s. 34(1) and after examining the return made, he assessed
the income of the appellant at Rs. 89,002/-by his order dated the 31st March,
1960. The appellant filed an appeal against the assessment order to the Appellate
Assistant Commissioner but the appeal was dismissed, the appellant preferred a
further appeal to the Income-tax Appellate Tribunal, Madras Bench. The
appellant did not dispute the quantum of the assessment but only the
jurisdiction of the Income-tax Officer to initiate proceedings under s. 34(1).
The Tribunal by its order dated the 31st
January, 1962 over- ruled the objection and dismissed the appeal. At the
instance of the appellant, the Tribunal referred the following question of law
for the opinion of the High Court:
"Whether the Income-tax Officer had
jurisdiction to initiate proceedings for the assessment year 1951-52 under the
provisions of s. 34(1) (a) of the Indian Income-tax Act of 1922".
The High Court answered the question against
the appellant holding that the Income-tax Officer had jurisdiction to initiate
proceedings against the appellant under s. 34(1) (a) of the Act for the
assessment year 1951-52. This appeal is brought by special leave against the
judgment of the High Court dated the 24th July, 1963.
592 On behalf of the appellant Mr.
Gopalakrishnan contended in the first place that the reasons which induced the
Income- tax Officer to initiate the proceedings under s. 34 were justiciable.
It was submitted that those reasons should have been communicated by the
Income-tax Officer to the assessee before the assessment was made. In this
connection, the further argument of the appellant was that those reasons
"must be sufficient for a prudent man to ,come to the conclusion that the
income had escaped assessment".
In our opinion, there is no substance in any
one of these arguments. It is true that two conditions must be satisfied in
order to confer jurisdiction on the Income-tax Officer to issue the notice
under s. 34 in respect of assessments beyond the period of four years, but
within a period of eight years, from the end of the relevant year. The first
condition is that the Income-tax Officer must have reason to believe that the
income, profits or gains chargeable to income-tax had been under-assessed. The
second condition is that he must have reason to believe that such "under-
assessment" had occurred by reason of either (i) omission or failure on
the part of an assessee to make a return of his income under s. 22, or (ii)
omission or failure on the part of the assessee to disclose fully and truly all
the material facts necessary for his assessment for that year. Both these
conditions are conditions precedent to be satisfied before the Income-tax
Officer acquires jurisdiction to issue a notice under the section. But 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 Income-tax 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 Income-tax Officer
did not hold the belief that there had been such nondisclosure. 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 "reason 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 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
593 of law. [See Calcutta Discount Co. Ltd., v. Income-tax Officer Companies
District 1, Calcutta and Anr.(1)] In the present case the High Court has
pointed out that the Income-tax Officer when examining the relevant material in
the proceeding for the assessment year 1955-56 found that the appellant had
made investments to the extent of Rs.
39,000/- in the account 1 year under question
when the income assessed was only Rs, 36,068/-. On further examination it was
discovered that items of house property acquired long before the relevant
accounting year had been suppressed. The High Court, therefore, held that the
Income-tax Officer had reasonable grounds for thinking that there was
non-disclosure on the part of the appellant and that there was under-assessment
for the assessment year 1951-52.
It was _also contended for the appellant that
the Income-tax Officer should have communicated to him the reasons which led
him to initiate the proceedings under s. 34 of the Act.
It was stated that a request to this effect
was made by the appellant to the Income-tax Officer, but the Income-tax Officer
declined to disclose the reasons. In our opinion, the argument of the appellant
on this point is misconceived.
The proceedings for assessment or
reassessment under s. 34(1) (a) of the Income-tax Act start with the issue of a
notice and it is only after the service of the notice that the assessee, whose
income is sought to be assessed or re- assessed, becomes a party to those
proceedings. The earlier stage of the proceeding for recording the reasons of
the Income-tax Officer and for obtaining the sanction of the Commissioner are
administrative in character and are not quasi-judicial. The scheme of s. 34 of
the Act is that, if the conditions of the main section are satisfied a notice
has to be issued to the assessee containing all or any of the requirements
which may be included in a notice under s sub-section (2) of section 22. But
before issuing the notice, the proviso requires that the officer should record
his reasons for initiating action under section 34 and obtain the- sanction of
the Commissioner who must be satisfied that the action under s. 34 was
justified. There is no requirement in any of the provisions of the Act or any
section laying down as a condition for the initiation of the proceedings that
the reasons which induced the Commissioner to accord sanction to proceed under
section 34 must also be communicated to the assessee.
In The Presidency Talkies Ltd. v. First
Additional Income- tax Officer, City Circle II, Madras,(2) the Madras High
Court has expressed a similar view and we consider that that view is correct.
We accordingly reject the argument of the appellant on this aspect of the case.
(1) 41 I.T.R. 191.
(2) 25 I. T. R. 447.
594 Lastly, it was submitted by the appellant
that the proceedings under s. 34 were invalid because the Income-tax Officer
did not entertain the belief that the under- assessment was made by reason of
the omission or failure on the part of the assessee to make a return under s.
22 or to disclose fully and truly all material facts necessary for the first
assessment. There is no substance in the argument. The Tribunal has found that
there was direct connection or nexus between the assessee's omission or failure
to make a return and the under-assessment made by the Income-tax Officer for
the year 1951-52. The High Court has affirmed this finding and concluded that
the proceedings under s. 34(1)(a) of the Act were not defective in law.
For these reasons we dismiss this appeal with